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By Kyle Anthony, Benzinga
The adage ‘variety is the spice of life’ highlights that having more choices and options allows for a better quality of life. The ability to choose a desired item or outcome is a privilege that widens the scope of possibilities for individuals, allowing them to exercise creativity and engage ingenuity. Cboe Global Markets, Inc. (CBOE: CBOE) wants to bring you options – more choices for your trades – and is actively bringing to market a suite of investment offerings that aid investors and traders in realizing their investment goals.
Variety Is the Spice of Life – Having Choices Makes Options Better
Cboe® offers traders a diverse selection of index options, which enable them to trade based on their directional view of the overall market – bullish, bearish or neutral. Individuals with a firm conviction of how the broad stock market will move could consider trading index options. If one anticipates the market will have an upswing, traders and investors may use call index options to capitalize on the potential movement. Conversely, to hedge against a market downturn, put index options may help mitigate losses to the portfolio.
For individuals looking to trade index options, Cboe Global Markets has multiple offerings within its S&P 500 Index options suite: Cboe SPX, , Cboe XSP (Mini-SPX) and Cboe Nanos. Though the user-type for each product is distinct, the value proposition provided by each is consistent.
SPX, Cboe’s leading index option offering, allows investors to gain efficient market exposure to the S&P 500 Index. The broad market exposure this offering provides makes it ideal for speculating on market movements or hedging portfolio risk. Experienced institutional investors and high-net-worth investors typically trade SPX. However, retail trading has seen an increase in recent years as well, Cboe says.
Cboe’s XSP index options are typically traded by retail traders and smaller institutional investors, as it is one-tenth of the size of SPX. XSP’s greater flexibility in managing large-cap U.S. equity exposure makes it more affordable and accessible for smaller investors, while maintaining all of the benefits of index options.
Though small in size, Nanos is distinct in its objective, as this offering allows individuals to familiarize themselves with index options. Nanos trades at one-hundredth the size of an XSP contract. The specific sizing makes them more accessible to retail investors with limited capital, enabling them to potentially capitalize on market movements at a limited cost outlay.
Cboe says it is all about bringing more choice to traders, and it offers choices at the other end of the market capitalization spectrum, too. While the aforementioned index options focus on the S&P 500 Index – which tracks the stock performance of 500 of the largest listed U.S. companies – Cboe also has index options that provide exposure to the Russell 2000 Index, which tracks the smallest 2,000 stocks in the Russell Index. These include Cboe RUT and Cboe MRUT.
Furthermore, Cboe also offers options on the Cboe Volatility Index. VIX index options, which were introduced by Cboe in 2006, were the first exchange-traded options that allowed retail traders to trade expected market volatility.
Cboe VIX index options enable traders to hedge portfolio volatility risk distinct from market price risk and trade based on their expectation of the future direction or movement of volatility. As mentioned earlier, Cboe VIX index Options are based on the Cboe Volatility Index, one of the most well-known indices globally and a popular part of many traders’ options trading strategy. The VIX Index is essential to understanding market sentiment.
The Value Proposition Of Index Options
The primary value proposition of index options is their comprehensive market exposure and diversification. However, their functional benefits, namely, cash settlement and European-style exercise, are also among the top-of-mind benefits investors and traders may derive from using these instruments. Cash settlement means that the buyer of an option contract receives the cash difference between the strike price and the current market price of the underlying security. Practically speaking, given that the underlying asset is an index – physical settlement is not feasible; hence, the buyer receives an amount of cash equal to the underlying asset's value when the option is exercised. European exercise refers to index options only being exercised at expiration, eliminating the risk of early assignment - the chance that an option holder exercises it before the expiration date. This typically happens with American-style options, which allow early exercise.
In addition to the benefits mentioned above, utilizing index options to generate income is another potential benefit, as investors and traders can sell covered calls or cash-secured puts and collect premiums as income. Finally, the financial efficiency within index options can allow investors and traders to control large positions with relatively small capital outlays.
Taking Action With Cboe’s Index Options
Cboe provides this information on its website, detailing the index options suite and the benefits investors and traders can derive from using these solutions. The exchange operator has also produced a guide that details the practical benefits of using index options.
Additionally, Cboe offers The Options Institute, which helps both beginners and sophisticated options traders familiarize themselves with foundational knowledge on options or learn new developments taking place within the investment derivatives landscape. The Options Institute provides comprehensive courses and tools, equipping investors with much of the knowledge needed to navigate the complexities of options trading effectively.
Cboe's index options allow access to diversified markets, provide cash settlement, multiple expiries and contract sizes, and are accessible to a variety of traders, enhancing the product experience. For traders and investors who desire optionality and flexibility, Cboe’s suite of index options offers that and more.
Featured photo by Tyler Prahm on Unsplash.
Benzinga is a leading financial media and data provider, known for delivering accurate, timely, and actionable financial information to empower investors and traders.
This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.
Disclosure: Life is Better with OptionsSM is a service mark of Cboe Exchange, Inc. or its affiliates.
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