Options On ETFs Or Indexes?

July 21, 2016

Settlement Type

As stated above, options on SPY are physically settled, and options on SPX are cash settled.

For example, if at expiration you owned 10 SPY call options with a strike price of 200 and the SPY closed at 201, you would have the right to purchase 1,000 shares of SPY at 200, which is $1 per share below the current price. Ten contracts times 100 shares times $1 per share means $1,000 of intrinsic value.

With index options, the exercise-settlement amount is equal to the difference between the exercise-settlement value and the strike price of the option, multiplied by $100. So for a similar example using SPX, let's assume that, at expiration, you owned one SPX call option with a strike price of 2,000 and the SPX settlement value (symbol: SET) is calculated to be 2,010. You would then have the right to a cash settlement for the difference between the settlement price and the strike (2,010 – 2,000), times a $100 multiplier, and times the number of contracts owned. In this case, 1 contract x 10 x $100, or $1,000 of intrinsic value.

Exercise Style

European-style exercise simply means you are only able to exercise an option at expiration, while American-style exercise means you are able to exercise an option at any time during the contract's life. For an options seller, a European-style exercise option may be a good thing, because you know you won't be assigned a position before expiration.

AM/PM Settlement

SPY options are PM-settled, which means that exercise/assign - ment activity will result in the delivery of SPY shares. Only the option holder may initiate exercise/assignment activity, and it is done so at their discretion. Traditional SPX options with third- Friday expirations are AM-settled. This means the cash settle- ment in exercise/assignment is based on a calculation using the opening sales price in the primary market of each component security in the S&P 500. SPX Weeklys options, which expire on Fridays (other than third Fridays) and on Wednesdays, are PM- settled. This means exercise/assignment is based on a calcula- tion using the closing sales price in the primary market of each component security in the S&P 500.

Extended Trading Hours

SPX and the CBOE Volatility Index (VIX index) are currently the only options listed on the CBOE extended trading hours to trade between 2:00 a.m. and 8:15 a.m. Chicago time, Monday through Friday.

Tax Treatment

Under section 1256 of the Tax Code, profit and loss on transactions in options on the SPX are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided the investor involved and the strategy employed satisfy the criteria of the tax code.

Investors should consult with their own tax advisors to determine the tax calculation method for profits or losses on any specific option strategy. Tax laws and regulations change periodically and may be subject to different interpretations.


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