We are going to hold our DJX spread and take our chances on the settlement numbers tomorrow.
I wanted to wait until the last 5 minutes, but I need to be sure you get the email in enough time to
make a decision.
For those of you who don't know how settlement works, here it goes:
Exercise will result in delivery of cash on the business day following expiration. The exercise-settlement
value, DJS, is calculated using the opening sales price in the primary market of each component
security on the last business day (usually a Friday) before the expiration date.
The exercise-settlement amount is equal to the difference between the exercise-settlement value and
the exercise price of the option, multiplied by $100.
The Settlement Value Symbol is: DJS
The bottom line: If the DJX settlement number on Friday is higher than 101, every $0.01
in the money is equal to $1.00 or(0.01) multiplied by 100. Since we collected $0.25 NET CREDIT for the
spread, a settlement number above $101.25 ( which is equal to DJIA 10,125 ) will produce a loss of $1.00 a
point in the DJX times the 50 contracts we have or $50 loss for every DJIA point over 10,125.
In other words the breakeven is DJIA 10,125.
If the DJX settlement number comes in at 101 or below ( DJIA 10,100 ) we keep the credit we received
for the spread which was $0.25 X 100 X50 contracts = $1,250.
Anything between 101.01 and 101.25 gives us a profit of $50 for per DJIA under 101.25
The closer to 101 the more we keep, the closer to 101.25 the less we keep. Over 101.25 we begin the
For those who are apprehensive about the Friday settlement, TODAY is the last day to
close out the position at whatever the market maker offer. After the close today, we are at the mercy of
the settlement numbers. REMEMBER, it is not the closing price on Friday but the OPENING price on each of
the 30 DJIA components that determines the SETTLEMENT price.
If you decide to bail, The DJX 101 Call is trading around $0.13 - $0.20 or slightly more , but that
could change going into the close. So your only choice might be market at close to be sure you get filled
and not face the uncertainty of the settlement price on Friday.
As I mentioned We are going to hold our position on any price that looks like a close below DJIA 10,050
and hope for a SETTLMENT opening of less the 101 or DJIA 10,100 tomorrow.
For those who wish to exit please do so before the close or at MARKET on close. This will be your final
chance before settlement numbers. Once the market closes today, we are at the mercy of the sETTLEMENT
numbers tomorrow. Settlement SYMBOL: DJS.
CAVEAT: If the DJIA components should open tomorrow up 300 points you could be liable for $2.00 X 100
X 50 contracts or $10,000 less the $1250 you received when you initiated the trade which could be as much
If on the other hand, the DOW components flat or down or only up a few dozen points, you keep the
$1,250 premium we received.
So it boils down to how you feel about the opening tomorrow.
Remember a lot of things can happen overnight and before the opening that could affect the DJIA
components and their opening numbers.
I want to be sure everyone is on the same page when they make their decision today.