• Margin rule change aims to enhance capital efficiencies when writing cash-settled index options against ETFs based on the same index
• Enables traders to use cash-settled index options as an efficient trading and hedging tool to manage positions at a potentially lower cost
• Cboe’s suite of index options offer cash-settlement, European-style exercise and potential tax benefits

Cboe Global Markets, the world’s leading derivatives and securities exchange network, announced the introduction of enhanced margin treatment for cash-settled index options. Cboe’s margin relief rule aims to provide greater capital efficiencies for traders and reflects its ongoing commitment to advocating for smart and responsive market structure enhancements that meet the evolving needs of its customers.

Cboe’s margin relief rule offers enhanced margin treatment when writing, or selling, a cash-settled index option in a margin account against an exchange-traded fund (ETF) that is based on the same underlying index. In the same way an investor can write an equity call option while holding a long position in the underlying security (i.e., a “covered” call), Cboe’s rule change allows for writing of index options in a similar manner. An investor, for instance, could write a call option on the Mini S&P 500 Index option (XSP) while having a long position in a corresponding ETF such as the iShares Core S&P 500 ETF (IVV), SPDR® S&P 500® ETF Trust (SPY), or Vanguard S&P 500 ETF (VOO) to potentially enhance returns on their ETF.

Under the prior framework, there was no margin requirement for a short call that qualified as “covered.” Given the similar risk/return profiles of writing an index call option (e.g., XSP) against a long ETF position (e.g., IVV, SPY, VOO) vs. writing a covered call, Cboe’s rule now treats these index options as protected for margin purposes – and not subject to uncovered option margin requirements. This rule change is expected to enable traders to adopt overwriting options strategies at a potentially lower cost than is possible under the existing margin requirement, ultimately creating a more capital-efficient and flexible trading experience.

“Our margin rule represents an exciting development for the options market and provides an additional way for investors to incorporate cash-settled index options in their trading strategies,” said Catherine Clay, Head of Global Derivatives at Cboe Global Markets. “Index options can be an excellent trading and hedging tool, offering many unique advantages over existing alternatives. For investors with ETF positions, index options allow them to overwrite long positions with the ease of cash settlement, while potentially mitigating risks of early exercise and capitalizing on potential tax advantages. Our margin relief rule may also potentially free up capital for investors – which means more resources to allocate to other market opportunities to optimize their trading outcomes.”

Cboe is the exclusive home for S&P Dow Jones, FTSE Russell and MSCI index options, along with options on the Cboe Volatility Index (VIX). Cboe’s proprietary suite of index options are cash-settled (no transfer of the actual underlying asset; instead, any profit or loss is exchanged in cash upon expiration) and European-style (options can only be exercised at expiration, removing call-away risk and facilitating easier management of positions.)

Cboe’s rule applies to any index call or put option written against a position in a non-leveraged index mutual fund or non-leveraged ETF that is based on the same index underlying the index option and held in the same margin account. FINRA recently adopted a similar margin relief rule which conforms to Cboe’s rule.

Source: Cboe