S&P 500® Range Options
Range Options give investors with an outlook on S&P 500 Index prices a new way to gain exposure to the market
Chicago Board Options Exchange, Incorporated (CBOE) has created a new class of S&P 500 Index options,
called CBOE S&P 500 Range Options, ticker symbol SRO. Range Options are European-style, cash-settled
options that have a positive payout if the settlement value of the underlying index falls within the specified
range - known as the "Range Length" (set at 70 S&P 500 Index pts.) - at expiration and a predetermined
maximum risk (loss) equal to the premium paid (plus commission costs) if the settlement value falls outside
of the range. Range Options will be offered with a number of different strike prices (representing various
70-point ranges) to choose from.
A single Range Option replicates four (4) individual call options on the S&P 500 Index ("SPX") to create
one efficient product. Many trading professionals refer to this complex multi-legged strategy as a Condor.
CBOE has standardized and streamlined this method to provide a simple, cost effective and lower-risk
tool for non-professionals to partake in one of the most popular trading strategies utilized in high and low
volatility environments. Additionally, given Range Options' lower risk profile they can be purchased or
written in a cash account. The illustration below demonstrates the 70 point SPX range length (1365 to 1435)
that would comprise a typical Range Option.
If a market participant anticipates the S&P 500 Index to fluctuate in a particular range, (i.e. a low volatility
trading environment), the market participant may consider buying a Range Option with the expectation
that the underlying S&P 500 Index will settle within the specified range length (1365 and 1435) at expiration.
Contrarily, if they believe the S&P 500 Index will trade in a wide range, i.e. perhaps from a high volatility
environment, the market participant may consider writing a Range Option with the expectation that the
underlying S&P 500 Index will settle outside the range length, either below 1365 or above 1435 at expiration.
Range Options provide:
- Streamlined method to trade a complex (multi-legged) strategy
- Cost effective tool to execute a complicated order
- Predetermined risk profile as maximum profits and losses are transparent and limited
- Versatile strategy that provides opportunities to take advantage of either low or high volatility trading
- In many cases low cost premiums affords attractive risk-reward profiles
- And, they can be purchased or written out of a cash account
For additional information please contact: Doug Hoffman 312-786-7699, or at Hoffman@cboe.com
RG12-117: SRO Product Description / Margin and Net Capital Requirements
RG12-120: Transaction Fees in CBOE S&P 500 Range Options
CBOE S&P 500 Range Options Webcast by Russell Rhoads