Cboe's® Mini Index Options Offer More Accessibility — Here's How

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This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

A wealth of investment vehicles have been configured in the image of one of the stock market’s most common sayings – “don’t put all your eggs in one basket.” 

Investors have often used standard exchange-traded funds (ETF) like the SPDR S&P 500 SPY, Invesco QQQ Trust Series 1 QQQ, and iShares Russell 2000 ETF IWM to heed this advice and make bets on the direction of the market (or a large portion of it). 

The use of options to trade these ETFs has also exploded in recent years. Despite their popularity, however, ETF options come with byproducts that can make it difficult to consistently profit or successfully hedge against existing positions. As a close cousin to the ETF option, a cash settled index option may provide investors benefits without as many risks. 

Cboe Global Markets Inc. CBOE is taking this concept one step further: With the Mini-S&P 500 Index (XSP^SM) and Mini-Russell 2000 (MRUT^SM) Index, it is providing investors with access to these instruments – and all their benefits – at 1/10th the size of standard contracts - providing greater accessibility based on your portfolio size. 

What Benefits?

1. European Options and Cash Settlements 

Equity options – including ETF options – can be exercised at any time. This feature presents both buyers and sellers with potential complications. 

Consider the call seller whose position is deep in the money for 2 minutes and deep out of the money for the remaining duration of the options contract. Because of the exercise-at-any-time rule, this seller may still lose money if the buyer exercised their right to buy 100 shares of stock at the strike price when the position was deep in the money. 

Now consider the investor who buys a call option with a week’s expiration – then goes on holiday for two weeks. Suppose during that time, the contract was exercised and they were granted the 100 shares of stock at a profit, but unexpected news caused the stock price to drop significantly below the initial entry before returning from the holiday. This buyer would have appropriately captured profit from the options contract but lost anyway because equity options are settled in stock rather than cash. 

When trading Mini-SPX options, there’s no threat of early exercise and no position uncertainty. These options are settled in cash (not shares), so there’s no need to square up positions after expiration. Plus, Mini-SPX options are so-called “European options,” which means they can only be exercised at expiration.

2. Tax Efficiency 

According to Section 1256 of the tax code, those who choose to trade index options may qualify for 60% long-term, 40% short-term capital gains tax treatment given that certain conditions are met. Because of the nature of index options, they settle to cash instead of shares, and investors cannot exercise them before expiration. ETF options are not part of this tax benefit. 

3. Dividend Risk Avoidance 

Option sellers hold the obligation to deliver not only the 100 shares of stock at the strike price but also the dividend incurred during the holding period – if the buyer chooses to exercise their right. The option seller, thus, has to fork over both stock and cash to the buyer, and this requirement is true for both naked and covered options.

For option sellers, there’s no escaping these obligations with ETF options, but there is an escape with Mini Index options. While dividends are often relatively small, because indices do not pay dividends, Mini Index option sellers don’t need to worry about dividend risk.

4. Affordability

The final, and most obvious, benefit to using Cboe’s Mini Index options is their extreme affordability, which makes them far more accessible to retail traders.

Learn more at Cboe’s Retail Trader Suite or try our your own strategies with the Trade Optimizer.

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

The authors prepared this article at the request of Cboe to describe Mini Index Options. Readers should understand that the authors were compensated by Cboe for the preparation of this article, which was not intended to be used in connection with the offering for purchase or sale of any product. The information in this article is for informational purposes only and no statement within this article should be construed as investment advice or a recommendation to buy or sell Mini Index Options. The authors and Cboe make no representation as to the appropriateness of Mini Index Options for any investor. Neither the authors nor Cboe assume any responsibility for any losses you might suffer by reason of investing or trading in Mini Index Options.