Putting pieces together
We have seen two different prices for the OEX so far. The price of the cash settlement was $637.31, and the price of the synthetic OEX stock was $636.35. This difference creates the OEX early exercise opportunity. The greater the disparity between the two prices, the more beneficial it is to exercise early. In this example, the difference in the two prices comes out to be $0.96 ($637.31 – $636.35).
Early exercise arbitrage = cash settlement – synthetic price
Early exercise arbitrage = $637.31 – $636.35
Early exercise arbitrage = $0.96
Note: A positive value indicates a call exercise and a negative value indicates a put exercise.
Revisiting what we have discussed to this point, we see that the cash market closes and settles at 3 p.m. when the New York Stock Exchange closes. On Thursday afternoon, the cash closed at $637.31. The OEX options and S&P 500 futures continued trading for 15 minutes after the 3 p.m. close.
The market then sold off slightly after 3 p.m. for any number of reasons, making the purchase of the OEX more reasonable ($0.96 cheaper) than at 3 p.m. But because we were allowed to exercise our current options up to 4:30 p.m. Central (1 hour, 30 minutes past the cash close), we could trade both the cash and synthetic prices.