A portfolio manager recently called me to discuss Mini-SPX (ticker XSP) options, and told me he is trading the XSP options and he liked several features about the XSP options, including the “no-early-call-away” feature, the tax treatment, the contract size, and the fact that the XSP options prices appeared to track pretty well the prices of the larger-sized options on the S&P 500® Index (ticker SPX). 


As shown in the chart below, the average daily volume for XSP options grew from 7,765 in February to 21,981 in July (through July 21).


The volatility skew chart below from CBOE Livevol shows the implied volatility estimates for XSP options at the close on Friday, July 21. On that date the closing values were 247.25 for the XSP Index, 9.36 for the CBOE Volatility Index® (VIX®) (the second-lowest daily close for the VIX Index), and 134.53 for the CBOE SKEW Index (SKEW). The long-term average daily closing values since January 1990 are 19.5 for the VIX Index and 118.7 for the SKEW Index.

The XSP volatility skew chart below shows:

  1. Expirations on 15 upcoming dates in 2017 (including Fridays and end-of-months) are available for XSP options; and
  2. The implied volatility estimates for at-the-money XSP options ranged from around 5 to 12, and the implied volatility estimates for many of the out-of-the-money put options (with strike prices from 223 to 238, and that can be used for downside portfolio protection) were often much higher, with a range from around 11 to 22. With the SKEW Index at 134.53, one can expect generally higher implied volatilities for out-of-the-money XSP and SPX put options, when compared with at-the-money XSP and SPX options.

2XSP - Vol Skew


Key features of Mini-SPX (XSP) options include the following:

CONTRACT SIZE.  XSP options have 1/10th the value of the S&P 500® (SPX) Index options. On July 21 the closing values were 2472.54 for the S&P 500 Index and 247.25 for the XSP Index, and the notional value covered by the Mini-SPX options (with a $100 multiplier) was $24,725.  At 1/10th the size of SPX options, Mini-SPX options provide added flexibility. For example, if an investor is looking to hedge a specific amount of broad U.S. stock market exposure, Mini-SPX options may be helpful to achieve a specific desired exposure.

PM-SETTLEMENT. XSP and SPXW options are PM-settled. PM settlement is preferred by many investors, including those with end-of-day reporting needs. PM settlement gives investors the ability to trade in and out of positions on settlement day.

CASH-SETTLEMENT, EUROPEAN-STYLE EXERCISE. Cash-settlement and European-style exercise features are applied to XSP, SPX and most other index options (but not to SPY and other ETF options).  With XSP options, there is no risk of early assignment and loss of dividends, and upon assignment the investor may use cash rather than stocks.

MARGIN FOR COVERED POSITIONS. CBOE Regulatory Circular RG15-183 notes that CBOE rules allow a short position in a cash-settled-index option established and carried in a margin account to receive covered margin treatment, if the short option position is offset in the same account by an equivalent position in an index-tracking ETF that is based on the same index that underlies the short option(s). In order to receive covered margin treatment, the market value of the offsetting ETF position must be equivalent or exceed the current aggregate index value of the option being covered. One should note that not all ETFs are managed so as to maintain a share price that is a constant fraction (e.g., 1/10 th, 1/100 th, 1/1,000 th, etc.) of the index being tracked.

TAX TREATMENT.  Under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded index options, including SPX and XSP, are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the Tax Code. Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations.

TRADING PLATFORM.  Mini-SPX options trade on CBOE's Hybrid Trading System, which includes Remote Market Makers. Trading XSP options on CBOE's Hybrid Trading System offers investors a smaller-sized S&P 500 contract with the combined advantages of electronic trading and the open-outcry market on a single platform.

To learn more about the many ways in which XSP options can help you manage your portfolio, please visit www.cboe.com/XSP.