An Option For Every Trader? — Diving Into Cboe's SPX, XSP And Nano Options Contracts

Since 1973, Cboe Global Markets Inc. CBOE has racked up an arguably impressive portfolio of market-defining products. 

Aside from listing the first-ever options contract, it was also the first to list index options, VIX options and VIX futures. The first listed options marketplace, the first alternative venue to traditional equity markets and the first electronic communication network (ECN) for the institutional foreign exchange market belong to Cboe.

In 2021, Cboe seemed to have kept a watchful eye over the retail community, noting its prowess, growth and sheer will to be involved in markets that have often treated it poorly. The charts of AMC Entertainment Holdings Inc. AMC and GameStop Corp. GME have become hallmarks of the retail community’s rise to fame.

As a result, Cboe launched a trifecta of options contracts designed to give retail traders access to unique benefits and properties not found anywhere else on the market. These are SPX Index Options, Cboe Mini Options and Cboe Nanos. 

Benefits Of Index Options

With more than 4,500 optionable stocks and exchange-traded funds (ETFs), sensible traders and investors may be asking: Why trade index options? 

The first, and most obvious, advantage of trading index options is that they can help traders diversify a portfolio. When traders engage in an index, through options or funds, they inherently gain broad exposure to a basket of companies in one trade. Compared to single stocks, index options reduce the probability of experiencing a gap move and may help narrow the focus to market risk instead of individual companies’ risks. 

Index options are also European style, meaning they cannot be exercised before expiration. Equity options, on the other hand, can be exercised anytime. Additionally, index options are settled in cash rather than stock; thus, the result of an index trade is immediate, and the risk of stock price fluctuation is eliminated.

Aside from diversification and risk of early exercise, there are several technical reasons why a trader would invest in index options. The lower volatility on index options, for example, ensures there are fewer fluctuations to the valuation of a portfolio from catalysts like mergers and earning reports. Additionally, index options often have much narrower bid-ask spreads than single-stock options. This high liquidity means traders can buy and sell index options without the threat of transacting at a significantly different price than intended. 

Trading index options may also come with tax benefits. 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. 

SPX, XSP And Nanos

SPX

Cboe Global Markets offers investors three avenues for exploring index options. 

Traditional SPX option contracts, the first of the bunch, pair all the benefits of index options with flexible expiration dates to accommodate short-term and medium-term trades. SPX option contracts that settle on the third Friday of each month and settle before noon (AM-settled).

Other kinds of SPX options include SPX Weeklys (SPXW) and SPX End-of-Month (EOM) options, which, as their names imply, settle on a weekly and monthly basis. Unlike the aforementioned contract, SPX weeklies can settle on any business day of the week, and SPX EOMs settle at the end of the month. Both are PM-settled options. 

XSP

Adding to its list of market tools, Cboe® recently announced its Cboe Minis product line. At one-tenth the size of the standard contracts, the Mini-S&P 500 Index (XSPSM) Index options provide retail traders with more affordable alternatives to trading the Standard & Poor’s 500 Index (SPX). 

Cboe Minis reap most of the benefits of standard index options contracts at one-tenth the price, granting retail investors access to high-leverage opportunities and incredible flexibility. Minis, for example, qualify for tax benefits, and they can also be PM-settled on any day of the week between 8:30 and 3:15 p.m. CST. Like their larger counterparts, they come in standard, weekly and end-of-month expiration tiers. 

Cboe reports that Mini contracts have increased their volume by 200% since 2017, becoming more popular investment vehicles for retail and semi-professional traders worldwide. 

Nanos

Adding further affordability and simplicity to the options trading scene are Cboe Nanos. 

At 1/100th the price of a Mini-SPX Index Options (XSP) contract, Nanos are an easier-on-the-wallet option for trading options. They’re the only contract listed on the U.S. exchange with a 1 multiplier, so each contract has a low price. 

Additionally, Nanos only have three expiration dates, which always end on a Monday, Wednesday or Friday. Like SPX and Mini-SPX contracts, Nanos possess a European settlement style and may be entitled to tax benefits. 

An overview of SPX Index Options is given in the table below.

Check out this page to learn more or get started with Cboe’s option contracts.

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