Question about how credit spread and iron condor options on the RUT, and on other indexes that trade European style, settle and expire

Question:  I see that you closed out 1/2 of our RUT Feb 840/850 bear call spread position on Thursday, the week of expiration, in our autotrade accounts.  Can you please explain why you closed out this spread even though the underlying RUT index was trading safely near 834?   The RUT index seemed to be safely below our short RUT Feb 840 call.  

Answer:  Options on the RUT trade European style where they cease to trade on Thursday, in the week of expiration, and then the RUT settles on Friday.   For more on how European style options settle and expire please visit the FAQ Page at http://www.monthlycashthruoptions.com/FAQ.htm  and read entries #24 and #25.   If the underlying RUT index gets too close to our short Call on Thursday, in the week of expiration, we need to be careful since we don’t have any control over what value the RUT will settle at on Friday.  So we need to make sure that the RUT index stays a certain number points away from our short Call on Thursday, and if not we need to close it early to avoid settlement risk.   In this situation where we have the RUT Feb 840/850 bear call spread, the settlement value, RLS, needs to settle at 840 or less for us to keep 100% of the premium that we collected when we first opened the spread.

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