DATE: February 11, 2013
Can you explain the key difference between options on Exchange-Traded Funds and options on Indexes?
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."