An AM-settled index option is a cash-settled contract whose final value is fixed using the opening prices of the underlying index’s component stocks on expiration Friday morning, rather than the closing price that afternoon. AM settlement index options include the standard monthly SPX and NDX contracts that expire on the third Friday of each month, and the settlement figure is a Special Opening Quotation calculated from each stock’s first trade of the day.1Cboe. Settlement of Standard, A.M.-Settled S&P 500 Index Options That morning timing changes when you can trade, how your payout is calculated, and the overnight risk you carry into expiration.
How AM Settlement Differs From PM Settlement
The split comes down to which price snapshot sets your contract’s final value. AM-settled contracts lock in the opening trade prices on expiration Friday. PM-settled contracts use the closing index value at the end of that same Friday. Monthly contracts expiring on the third Friday use AM settlement; weekly contracts expiring on other Fridays use PM settlement.1Cboe. Settlement of Standard, A.M.-Settled S&P 500 Index Options
Your platform will usually show the difference in the ticker. For S&P 500 options, SPX is the standard AM-settled monthly contract, while SPXW is the PM-settled weekly series. NDX options on the Nasdaq-100 follow the same pattern: monthly expirations settle in the morning, weekly expirations settle at the close.2Nasdaq. Nasdaq-100 Index Options: XND and NDX Option chains often tag AM-settled expirations with an “AM” label; PM-settled contracts carry no special mark. If you aren’t sure which type you hold, check the ticker suffix before expiration week.
What the Special Opening Quotation Actually Is
The settlement value for an AM-settled contract is the Special Opening Quotation, or SOQ. It is not the index level at 9:30 a.m. Eastern. It is built from the actual first trade price of every individual stock in the index on expiration morning.1Cboe. Settlement of Standard, A.M.-Settled S&P 500 Index Options For the S&P 500, that means 500 separate opening prints feed into one composite number.
Those prints don’t all arrive at the bell. If a component stock is halted, has an order imbalance, or opens late, the SOQ waits for its first trade. If a stock never opens for the day, the previous session’s close is used instead.3Cboe Global Markets. Special Opening Quotation Mathematics The final SOQ can take a few minutes or more than an hour to finalize depending on how the opens go, and the index level you see trading mid-morning may differ meaningfully from the SOQ that settles your contract.
This is where traders get hurt. Watching the index’s opening tick and assuming that’s the settlement value can leave you off by several points. The SOQ is a synthetic figure. It stitches together opening prices from hundreds of stocks that print at slightly different moments, and no one can trade it as a single price.
When Trading Stops and Overnight Risk Begins
The last chance to trade or close a standard AM-settled monthly option is the Thursday before expiration Friday. The contract doesn’t expire until Friday morning, but the trading window shuts at Thursday’s close.4Cboe Global Markets. SPX Index Options Fact Sheet This catches people off guard more than any other feature of AM settlement.
Between Thursday’s close and Friday’s open you hold a position you cannot exit. Overnight news, foreign market moves, and pre-market economic releases can shift the index before the SOQ is calculated. Cboe does run Global Trading Hours for SPX options from 7:15 p.m. to 8:25 a.m. Chicago time, but standard AM-settled monthly contracts ordinarily stop trading on Thursday.4Cboe Global Markets. SPX Index Options Fact Sheet If you are short near-the-money options heading into that gap, the risk is already locked in by the time you’d want to react.
If you don’t want overnight expiration risk, close the position before Thursday’s close. Waiting until Friday morning to see what happens isn’t a plan, because the ability to act is already gone.
The calendar can shrink the window further. When the scheduled Friday expiration falls on an exchange holiday, settlement moves back one business day, typically to Thursday. That pushes the last trading day to Wednesday’s close, with the SOQ calculated Thursday morning.4Cboe Global Markets. SPX Index Options Fact Sheet Good Friday is the usual trigger during the March or April quarterly cycle. Check the exchange holiday calendar before expiration week to confirm your actual deadline.
How the Final Payout Reaches Your Account
Index options settle in cash. No shares change hands. The Options Clearing Corporation compares your strike to the finalized SOQ and calculates a dollar amount.5Cboe Global Markets. Benefits of Index Options – Cash Settlement If the contract is in the money, the credit is the difference between the strike and the SOQ, times the contract multiplier of 100. A 5,200 call settling against an SOQ of 5,215 produces a $1,500 credit (15 points × $100), debited from the seller and credited to the buyer through clearing, typically by the next business day.
Any contract in the money by at least $0.01 is automatically exercised by the OCC under its Exercise by Exception procedure. You don’t need to call your broker or submit instructions. A contract that expires out of the money simply expires worthless.
Standard index options like SPX are also European-style, meaning they can only be exercised at expiration.6Cboe Global Markets. Benefits of Index Options – European Style You cannot be assigned early, and you cannot exercise early. Combined with AM settlement, that produces a clean expiration: the SOQ is calculated once Friday morning, in-the-money contracts auto-exercise against it, and no one can force you out of a position before then.
Tax Treatment on Your Return
Cash-settled index options qualify as nonequity options under Section 1256 of the Internal Revenue Code, which carries its own tax structure separate from stock trades.7Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market Regardless of holding period, gains and losses are automatically split 60% long-term and 40% short-term.8Internal Revenue Service. Form 6781, Gains and Losses From Section 1256 Contracts and Straddles For traders in higher brackets, the blended rate ends up below what a fully short-term treatment would produce.
Section 1256 contracts are also marked to market. Any open positions at year-end are treated as if sold at fair market value on December 31, and the gain or loss is reported for that year. Section 1256 activity is reported on IRS Form 6781, which flows into Schedule D.9Internal Revenue Service. About Form 6781, Gains and Losses From Section 1256 Contracts and Straddles
There is one more feature stock traders don’t get: a three-year loss carryback. If you have a net Section 1256 loss, you can elect to carry it back against Section 1256 gains from the prior three tax years, which may generate a refund. The carryback applies only to the extent of those prior-year Section 1256 gains, not to other income.7Office of the Law Revision Counsel. 26 USC 1256 – Section 1256 Contracts Marked to Market If your trading mixes Section 1256 contracts with non-1256 positions, the wash sale and straddle rules get more complicated and a tax professional familiar with derivatives is worth the call.10eCFR. Wash Sales of Stock or Securities