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The Mechanics of Expiration


Sheryl is an index money manager who is long SPX index call options for long stock exposure. They are currently deep in the money and are expiring this morning on the opening. When they expire, Sheryl receives cash in the amount equivalent to the opening price of the index less the strike of her calls.

If Sheryl wants to maintain her long stock exposure, she must either roll her options or buy a dollar equivalent amount of stocks to replace her expiring options. She decides not to roll the options.

Sheryl is long 1000 SPX 900 calls; this is equivalent to 1000 x $ 900 x 100 = $90 mm in stock exposure. Last night the index closed at 1089.19, so the calls are intrinsically worth $189.19, so the total value of Sheryl's stock exposure is $90 mm + $19 mm = $109 mm. She decides to take a little exposure off the table and buy only $100 mm of stock.

She sends her broker an order to buy $100 mm of stock on the opening. The broker guarantees her the opening prices on a basket of SP500 stocks. The broker tells her that he has similar orders, so on balance their desk is a buyer of SP500 stock. Since she is reducing her exposure in stocks, this actually is good for her because in effect she is selling $9 mm of stocks at what should be higher prices.

After the opening she receives confirmation from her broker that the opening price of the index is 1094.67 and that she is long a net amount of $100 mm of stocks at this price. When she receives the breakdown of confirmations she indeed sees that if all the share amounts times the share prices are summed, the amount comes to $100 mm. She also receives from the broker a check for cash in the amount of ($1094.67 - $900) x 1000 x100 = $19,467,000.

After all the similar buying is done on the opening, the market trades once again on normal supply and demand.
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No positions in stocks mentioned.

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