Ask the Institute

Ask the Institute Archive

DATE: February 11, 2013

QUESTION:

Can you explain the key difference between options on Exchange-Traded Funds and options on Indexes?

ANSWER:
Exchange-Traded Funds, commonly called ETFs, convert into stock positions if they are exercised or assigned just like standard stock options. When an ETF is in-the-money at expiration, exercise or assignment causes you to buy or sell shares of the underlying stock, also known as settling to stock. Unlike ETFs, Index options convert into cash - not stock - if they are exercised or assigned. When an Index option is in-the-money at expiration, you would receive a cash amount equal to the option's intrinsic value. To learn more about other key differences between ETFs and Index options, view this week's segment of "Ask the Institute."

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