Trade SPX Options At 1/10th The Price With Cboe's XSP

As a market innovator, Cboe Global Markets CBOE is constantly producing new financial products. As a partner in the growth of the retail community over the past decade, Cboe has begun releasing a number of products tailored to them. 

The Mini-SPX Index Option Contract is one such product. Known by its symbol, XSP, the Mini-SPX Index Option is an index product designed to track the underlying SPX index. At one-tenth the size of standard SPX contracts, it’s one of the most affordable ways to engage in index-based options trading in the market.  

Consider, for example, that the price of the S&P 500 Index is currently 3,900. The approximate notional size of one SPX Index option would be $390,000, while the size of a Mini-SPX option would be $39,000. Mini-SPX contracts free up considerable capital for the investor while also granting the benefits of index options trading. 

XSP option contracts share the same benefits as their larger counterparts. They can help investors hedge positions, generate alpha and create income strategies, but they do so at a fraction of the standard price. XSP options can also be used to trade expected and non-expected events, a topic discussed in a previous article. Finally, XSP contracts contain a host of unique tax, accessibility and cost benefits. 

Trading XSP Options

Since they are linked to SPX, traders using XSP contracts gain access to a diversified basket of 500 stocks across various sectors. For those engaged in LEAPS or multi-leg options orders, XSP options can serve as a way to invest in a broad market index over a long-term horizon, while mitigating risk over single-stock options.

In addition to their affordability and breadth, XSP options also come with tax benefits. Under Section 1256 of the tax code, traders who trade index options may qualify for a 60% long-term and 40% short-term capital gains tax treatment, subject to certain conditions.

XSP options are cash settled, which means that traders receive a cash credit or debit to their trading account, rather than physical shares. In addition, being European exercise style, XSP is only exercised at expiration, eliminating the risk of early assignment. These benefits allow traders to benefit from their investment or hedging strategies and minimize the risk of losing profits due to a depreciating stock price after the option trade has ended.

Furthermore, XSP options protect call sellers from dividend risk. In the event of an in-the-money naked call and an upcoming ex-dividend date, assigned sellers are required to deliver the shares of the underlying security and the dividend income in cash. With XSP options, sellers are not responsible for buyers' dividend income, eliminating this threat.

Like standard SPX option contracts, XSP contracts offer a range of settlement date options, allowing users to hedge on any day of the week for ten times cheaper than standard-size option contracts. With these benefits, XSP options look to be an accessible and effective way for traders to manage risk while also taking advantage of upside potential.

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Featured photo by Alexei Maridashvili on Unsplash

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