A recent Cboe Notice stated that Cboe Exchange plans to list Wednesday-expiring weekly options on the Cboe Mini-SPX Index (XSP), beginning January 30, 2018. Cboe’s new XSP Wednesday-expiring Weeklys offer the features of S&P 500® Index (SPX) Weeklys options, but at 1/10th the contract size. The initial expirations for the new XSP Wednesday-expiring Weeklys are planned for February 7, 2018, February 14, 2018, and February 21, 2018. Going forward, new expirations will typically be listed on a Tuesday at least one week prior to expiration.

GROWTH IN VOLUME FOR MINI-SPX (XSP) OPTIONS

Cboe's XSP options have a manageable contract size that is available at a fraction of the cost of buying a basket of individual stocks. Mini-SPX options allow investors to efficiently gain broad-market exposure in a single trade.In addition, Mini-SPX options trade on Cboe's Hybrid Trading System, allowing investors to choose electronic or open-outcry trading. Average daily volume for XSP options grew from 320 in 2012 to 14,313 in 2017. www.cboe.com/XSP

MM1

As is shown on the left side of the next chart below, in the next two months there are about ten XSP Friday and end-of-month expirations (and Wednesday Weekly options are being added on January 30).

XSP VOLATILITY SKEW CHART SHOWS HIGHER IMPLIED VOLATILITY FOR O-T-M PUT OPTIONS

The XSP volatility skew chart below shows that XSP options implied volatility estimates ranged from around 9 for some at-the-money XSP options, to around 27 for some out-of-the-money XSP put options. There is investor demand for index put options that can provide portfolio protection in the event of a big drop in the S&P 500 Index. Investors can use skew charts to develop ideas for options buying and selling opportunities.
MM2

KEY FEATURES OF MINI-SPX (XSP) OPTIONS

Key features of Mini-SPX options include the following:

1. TICKER SYMBOL

The ticker symbol for Mini-SPX options is XSP.

2. CONTRACT SIZE

Mini-SPX options have 1/10th the value of the S&P 500® (SPX) Index options (e.g. if the S&P 500 Index is at 2800, the Mini-SPX would have a value of 280, and notional value covered by the Mini-SPX options (with a $100 multiplier) would be $28,000).

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.

3. PM-SETTLEMENT

XSP options are PM-settled.

PM settlement aligns with single-stock options and ETF options.

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.

The last trading day for the standard XSP options generally is on the third Friday of the expiration month.

4. CASH-SETTLEMENT, EUROPEAN-STYLE EXERCISE

Like SPX and most other index options, and unlike SPY and other ETF options,

No risk of early assignment and loss of dividends, no portfolio disruption on assignment,

Cboe Circulars (RG99-09 and RG00-171) allow SPX options to be written on a "covered" basis against SPY or IVV ETF shares in a margin account, provided the investor's brokerage firm has such policies in place.

5. MARGIN

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.

6. TAX TREATMENT

Under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded 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.

7. 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.

GROWTH IN VOLUME FOR SPXW WEDNESDAY WEEKLY OPTIONS

The large-sized SPXW Weekly options already show evidence of strong demand for S&P 500 options with Wednesday expirations. Average daily volume for S&P 500 Weekly (SPXW) options with Wednesday expirations grew from 26,652 in February 2016 to a record high of 149,742 in November 2017,
MM3

MORE INFORMATION

Webpages with more information include –

  • Mini-SPX (XSP) Index Options (with Wednesday, Friday, and end-of-month expirations)    www.cboe.com/XSP
  • S&P 500 Weekly (SPXW) Options (with Monday, Wednesday and Friday expirations)    www.cboe.com/SPXW