Get a Taste of Index Options with a Nano: A Smaller, More Affordable Options Contract
Access Index Options with Nanos: Trade with Less Capital
Index options aren’t just for institutional investors. Nanos are a great way to learn to trade index options using strategies like those used in standard-sized index options.
Small has benefits—mini desserts, free food samples, and beer flights. You gain a taste of their larger counterparts but with a smaller commitment. The same goes for options. You can now trade index options that are more affordable. Consider the Nanos S&P 500 Index options (Nanos).* You can gain exposure to the entire S&P 500 Index, for the cost of a cold brew.
Options are not suitable for all investors. Before trading Nanos, you should discuss with your broker whether trading Nanos is right for you and review the ODD regarding risks associated with trading options.
A Small Financial Commitment with Benefits
If you have a small account size and think that trading index options are out of reach, you may want to consider Nanos options. They’re smaller than standard index options and come with the same benefits as S&P 500 Index (SPX) options and Mini-S&P 500 Index (XSP) options.
The benefits of index options over trading individual stock options include:
- Diversification. In one trade, you gain exposure to 500 companies. This can be beneficial if you have an opinion on the overall economy and you want to take a directional bet on the broader market.
- No individual company risk. The risk of unexpected price moves from individual companies is reduced. You don’t have to worry about stock-specific risks such as earnings, stock splits, or M&A and how they may impact price movements.
- Exercise style. Index options are European style. That means these options can’t be exercised or assigned before expiration. Individual equity or exchange-traded fund (ETF) options are American style, which means you risk getting assigned any time before expiration.
- Settlement. Index options are cash-settled. That means your account is credited or debited in cash at expiration. No stocks or ETFs would be added to your account. So, there’s no need to worry about monitoring changes to stock positions in your account.
- Tax treatment. Index options could qualify for the 60/40 capital gains tax treatment (60% long-term, 40% short-term). It’s worth consulting your tax advisor about this.
How big is a Nanos options contract?
Nanos options are 1/100th the size of XSP options, which are 1/10th the size of SPX options. Because Nanos are smaller in size, their options premiums are proportionally lower than those of their larger counterparts.
And when you buy a Nanos contract, the most you can lose is what you paid for it (the premium), plus applicable fees and commissions. If you sell an option, then your risk is theoretically unlimited, and should put at risk only the funds that you can afford to lose without affecting your lifestyle.
Does an S&P 500 Index-based ETF option trade around the same price as Nano index options?
The underlying would trade at a similar price, however the options on these two assets would trade at different prices. There are differences you should understand.
What are some of the benefits of trading Nanos options?
- Contract multiplier. If you were to trade one options contract on the ETF at a price of $3, you’d have to multiply the trade price by 100 for a total premium of $300 (plus applicable fees and commissions). When trading Nanos options, it’s one-to-one because Nanos options have a 1 contract multiplier. That means if a Nanos option was purchased for $3, it would cost you $3 (plus applicable fees and commissions). It’s simpler than the larger index, stock, and ETF options which have 100 multipliers.
- Limited strike prices. Fewer strike prices are great for beginning options traders. This makes it easier to decide which strikes to trade. You can focus on options with strike prices close to the price of the underlying.
- Shorter-term expiration cycles. This is another factor that helps to simplify your decision-making. Shorter dated and fewer expiration cycles mean less to choose from and a shorter timeframe to hold the options contracts—helpful for learning and gaining trading confidence.
It may be easier to see the advantage of trading Nanos with an example.
Table does not take into account applicable fees and commissions.
From the table above, you can gain exposure to the S&P 500 Index for $1.20 with a Nanos options contract. And for that price, you could even buy more than one contract!
Let’s say you were willing to invest $500 towards various options strategies over a period of time. By using Nanos rather than S&P 500 Index-based ETF options, you could execute many Nanos trades, rather than only one trade in a 100-multiplier contract. By doing more trades, you can gain valuable experience from each trade. Due to Nanos lower price, you can tailor your positioning relative to your total portfolio value.
It is important to highlight that when trading a stock option or ETF option, you could be delivered physical shares at expiration (or earlier if the option is exercised prior to expiration). Also depending on which way the price moves and the type of position you opened, you may be required to add more cash to your account putting even more of your capital at risk.
If you buy Nanos, you receive cash instead of shares at expiration, if the contract expires in-the-money (ITM). For long contracts, your risk is limited to the premium you paid (plus applicable fees and commissions). If you sell Nanos, and the contract expires in-the-money, you pay cash at expiration, and the risk is theoretically unlimited.
Taking the Nano Step
Nanos may be tiny and give you exposure to the S&P 500 Index, however they are options contracts. Before trading Nanos, you should discuss with your broker whether trading Nanos is right for you and review the Characteristics and Risks of Standardized Options (or Options Disclosure Document) from The Options Clearing Corporation regarding risks associated with trading options. While these securities come with risks, they do have a lower price point and can be a great tool to begin trading options.
In closing, if you would like to practice trading Nanos, use a paper trading account with one of the brokerages that offer them. You can start with one contract. You may try different options strategies, learn to manage your risk, and understand the importance of position sizing. All these factors may help make you a smarter options trader. And when you’re ready, you may want to skip the cold brew and instead use that money to trade Nanos.
*Nanos trade on Cboe as a $1 multiplier option (versus a $100 multiplier for standard options) on the Mini-S&P 500 Index, which is 1/10th the value of the S&P 500 Index.
Options are not suitable for all investors. Before trading Nanos, you should discuss with your broker whether trading Nanos is right for you and review the Characteristics and Risks of Standardized Options (or Options Disclosure Document) regarding risks associated with trading options.
There are important risks associated with transacting in any of the Cboe Company products or any of the digital assets discussed here. Before engaging in any transactions in those products or digital assets, it is important for market participants to carefully review the disclosures and disclaimers contained at: https://www.cboe.com/us_disclaimers/. These products and digital assets are complex and are suitable only for sophisticated market participants. These products involve the risk of loss, which can be substantial and, depending on the type of product, can exceed the amount of money deposited in establishing the position. Market participants should put at risk only funds that they can afford to lose without affecting their lifestyle. © 2022 Cboe Exchange, Inc. All rights reserved.