CBOE announced that it plans to list a Mini-SPX Index options (options symbol: XSP) contract with a new PM-settlement feature on Tuesday, November 5. The XSP Index hit an all-time daily closing high of 176.21 on October 28 (see chart below).
Key features of the Mini-SPX options include —
CONTRACT SIZE AND ADDED FLEXIBILITY Mini-SPX options have 1/10th the value of the S&P 500® (SPX) Index options. On Oct. 28 the S&P 500 closed at 1762.11, and the Mini-SPX Index closed at 176.21, and notional value covered by the Mini-SPX options (with a $100 multiplier) was $17,621). At 1/10th the size of SPX options, Mini-SPX options provide added flexibility. For example, if an investor is looking to hedge $17,000 to $150,000 of broad U.S. stock market exposure, Mini-SPX options may be helpful to investors as they work to achieve a specific desired exposure.
PM-SETTLEMENT As of November 5, 2013, XSP options will have PM settlement. PM settlement aligns with single-stock options and ETF options. 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 the third Fridays. The last trading day for the standard XSP options generally is on the third Friday of the expiration month.
CASH-SETTLEMENT, EUROPEAN-STYLE EXERCISE
- Like SPX and most other index options, and unlike SPY and other ETF options
- No risk of early assignment and loss of dividends, no portfolio disruption on assignment,
o CBOE Circulars (RG99-09 and RG00-171) allow SPX options to be written on a “covered” basis against SPY or IVV ETF shares in a margin account, provided the investor’s brokerage firm has such policies in place.
As shown below, the XSP Index has marched upward since early 2009.
VOLATILITY SKEW AND POSSIBLE STRATEGIES
Investors who wish to trade Mini-SPX options (and any listed options) should keep an eye on the volatility skew for the relevant options. The chart below shows the XSP options volatility skew at the close on two recent dates – Oct. 8 and Oct. 28. Volatility was higher on Oct. 8 when there was wrangling in Washington DC over the government shutdown. With the XSP at all-time high levels, some novice investors might be tempted to buy 10% out-of-the money (OTM) index protective puts, but such investors should be aware that (according to the chart below) the recent implied volatilities were around 19.6 for the 10% OTM protective puts and only 10.8 for the at-the-money XSP options. You can visit the Index Options Strategy page at the CBOE Education website to learn more about various long and short strategies, and also visit www.cboe.com/XSP to learn more about XSP options.