Sometime late the morning of Friday, April 16, 2010, the CBOE released the RLS. What's the RLS, and why should you care?

Perhaps you shouldn't care if you weren't trading April options on the Russell 2000. If you were and had held them over without closing them out before expiration, however, the RLS told you whether you made or lost money on those April options.

RLS is the exercise settlement value of the RUT. The RUT, like most European-style options--with the XEO being an exception--settles "on the last business day (usually a Friday) before the expiration date," the CBOE product specifications page on the RUT explains. If my quoting service was correct, that settlement value on Friday, April 16, 2010, was 711.

As many options traders understand, however, this was not the opening price of the RUT. That was 723.57, a whopping 13.57 points above the settlement price. The previous day's close had been 724.21, with the settlement value an even farther 14.21 points below that previous day's close.

What if a trader had sold 10 contracts of a 720/710 bull put credit spread and decided to hold that spread, thinking that it was safe? That trader would have a horrific $9,000 deducted from his or her trading account. This is because the sold 720 put would have been $9.00 in the money. Multiplying that $9.00 by the number of contracts, 10, and by the multiplier by contract, 100, produces that $9,000 result. Of course, the $9,000 loss would have been offset by the original credit received for the trade, but that likely wouldn't have been anywhere near $9,000.

One theoretical calculator suggest that the spread could have been sold for about $0.90 the previous afternoon, so the loss would have been reduced by about $900.00 minus commissions if the trader had been able to collect that $0.90 the day before. Not much of a reduction, was it?

I've previously written about settlement values and the overnight risk that traders assume when they decide to leave European-settled index option positions open overnight on the Thursday before option expiration. However, this result shows why it's important to reiterate this message periodically.

European-style index options include those on the SPX, NDX, DJX, RUT and MNX, among others. Settlement values on these indices have nothing to do with where the underlying index closed the Thursday that their options stop trading. Nor, it sometimes seems, does the value have much to do with where the underlying index opens on opex Friday. As experienced traders understand--mostly because they've been caught once or twice with an unfavorable settlement value on opex Friday--the settlement values are calculated differently.

They're calculated from the opening value of each of the component stock in the index, not the opening value of the index itself. Those stocks sometimes open in a staggered fashion. If markets are dropping as the stocks are opening, each successive stock may be opening at a lower level, and the calculated settlement value may be much lower than the opening print on the index. The opposite can happen. This effect can feed on itself, so that there can be a great disparity between the opening values of the underlying index on opex Friday morning and the settlement values that come out an hour or two later for most indices. The RUT's settlement value tends to be a laggard among the releases, with the RLX typically appearing much later than the others do.

The OEX and XEO options are different. OEX options are American style, and XEO, European style, but both trade through opex Friday and settle at the close. Like their counterparts, though, the settlement value is determined based upon the closing values of the component stocks.

The CBOE offers all this information on the product page for each of the indices with options traded on the CBOE. You can read the specifications for the RUT's options here, including the information that the RLS is the RUT's settlement value. You can find similar pages for other indices. Check them out.