Cboe Teases Launch of Some of the Market's Most Affordable Options Contracts

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The next time you hear Wall Street is a place of equal opportunity, you might want to bring up the price of some options contracts. 

While the stocks of companies like Tesla Inc. TSLA, Amazon.com Inc. AMZN and Shopify Inc. SHOP shot through all-time highs, the exorbitant prices on their option chains left thousands of retail traders on the sidelines. As institutions lined up hundreds of millions of dollars in profit, most retail traders were, once again, left to find their own paths to riches. 

The lofty prices of options contracts are just a thread in the garment of difficulties that retail traders are forced to bear. Robinhood Markets Inc.’s HOOD decision to temporarily restrict retail traders from buying shares of GameStop Corp. GME and AMC Entertainment Holdings Inc. AMC in early 2021 serves as a poignant reminder of this reality, and reverberations from this decision are still alive now. 

The term “AMC Apes” remains — willingly — latched onto retail traders as the company’s stock story continues to play out. Several communities on platforms like Twitter TWTR, Discord and Reddit have formed with a mission to replicate a people’s version of institutional buying, selling and market making. Most notably, these terms and communities indicate that the retail community has not forgotten the injustice in a place of supposedly equal opportunity. 

Despite this, some major market figures have taken note of these developments and have taken action to mend some wrongdoings. 

Cboe Global Markets Inc. CBOE, for example, has launched products that arguably provide retail traders with greater access to the options market.

The Path to Affordable Securities?

The retail community saw some of the first signs of this initiative with the release of Cboe’s Minis, that allows retail traders to trade miniature versions of indices like the S&P 500 Russell 2000, and the Cboe Volatility Index® (VIX® Index)  at 1/10th the size.

In early 2022, Cboe plans to take things to the next level by launching Nanos by Cboe (NANOS). “The price of standard options contracts can be a barrier to entry for the everyday retail trader,” the company writes. “Nanos by Cboe (NANOS) is a one-multiplier, cash-settled option that makes trading possible at lower prices with less exposure.”*

At a fraction of the size of a standard contract, this lower-stakes option could open the world of options trading to a wider audience than ever before. Nanos by Cboe are listed on the Mini-S&P 500 Index.

Cboe believes the options’ general 1-week expiration dates and its limited strike prices provide an opportunity to test short-term goals and strategies in a simple, low-risk environment.

Benefits of Nano Index Options

Cboe’s Nanos are 1/100th the price of a Mini-SPX Index Options (XSP) contract.**

Their affordability may provide retail traders with unparalleled buying power, allowing them to size in on trades that they have high conviction in. They also provide a manageable way for traders to express their opinions about future market movements. With limited strikes, they also allow for easier decision making, especially for someone new to options.

Additionally, Nanos Index Options share similar benefits to Cboe’s Mini products — namely, the settlement of the options contracts that occurs through cash rather than equity. “The exercise settlement value is 1/10th the value of the official closing price of the S&P 500 Index as reported by Standard & Poor’s on the last trading day of the expiring series,” writes Cboe.

Additionally, traders may be able to keep more of their gains using Nanos. 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.

Paving the Way? 

Retail traders looking for this kind of instrument on individual stocks may brood over the specificity of Cboe’s Nano and Mini products, but that could be a pessimistic view of these developments.

Having market-shaping companies like Cboe working in favor of retailers could be considered a significant step forward in the process of creating a truly equal playing ground. Who knows what benefit Cboe’s next product will provide to retail traders.

For now, the company’s Nano and Mini products may serve as a good starting point. 

*Nanos trade on Cboe as a one-multiplier (i.e. micro) option (with 1/100th the value of a standard option) on the Mini-S&P 500 Index (equivalent in value to the Nanos S&P 500 Index), which is 1/10th the value of the S&P 500 Index.

 **While capital risk for a contract holder is limited to the price of the premium and is thus reduced relative to the same number of standard contracts, the capital risk associated with writing Nanos by Cboe contracts remains open-ended. In addition to the premium price, a contract holder may also need to pay applicable fees and commissions.

 There are important risks associated with transacting in any of the Cboe Company products discussed here. Before engaging in any transactions in those products, it is important for market participants to carefully review the disclosures and disclaimers contained at http://www.cboe.com/options_futures_disclaimers.

Readers should understand that the authors were compensated by Cboe for the preparation of this article, which is 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 a financial product. The authors and Cboe make no representation as to the appropriateness of XSP or MRUT options for any investor. Neither the authors nor Cboe assume any responsibility for any losses you might suffer by reason of investing in XSP or MRUT options.

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