In recent years many investors have expressed interest in more flexibility for index options in terms of both contract size and and more expirations. So far this month (through October 20) Cboe’s options on the Mini-SPX Index (ticker XSP) have had average daily volume of more than 30,800 contracts. XSP options are on track to set an all-time record for average daily volume in a month (the previous high for average daily volume in a month was around 23,760 contracts)
XSP VOLATILITY SKEW CHART
The volatility skew chart below from Cboe Livevol Pro shows the implied volatility estimates for XSP options on the morning of October 23. The XSP volatility skew chart below shows:
Expirations on 17 upcoming dates (including Fridays and end-of-months) are available for XSP options; and
The implied volatility estimates for many of the at-the-money XSP options ranged from around 6 to 11, and the implied volatility estimates for many of the out-of-the-money put options (with strike prices from 232 to 250, and that can be used for downside portfolio protection) were often much higher, with a range from around 11 to 29. (Related to the point of higher implied volatility for out-of-the-money index puts, the Cboe Skew Index closed at a relatively high value of 148.81 on October 20; visit www.cboe.com/SKEW for more details).
KEY FEATURES OF XSP OPTIONS
Key features of Mini-SPX (XSP) options at Cboe include the following:
CONTRACT SIZE. XSP options have 1/10th the value of the S&P 500® (SPX) Index options. On the morning of October 23 the approximate values were 2570 for the S&P 500 Index and 257 for the XSP Index, and the notional value covered by the Mini-SPX options (with a $100 multiplier) was $25,700. 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.