Cboe launches margin relief rule for cash-settled index options

Rick Steves

The margin relief rule offers enhanced margin treatment when writing, or selling, a cash-settled index option in a margin account against an ETF that is based on the same underlying index. 

Cboe Global Markets has launched an enhanced margin treatment for cash-settled index options, aiming to increase capital efficiencies for traders.

The new margin rule allows for better margin treatment when selling cash-settled index options against an exchange-traded fund (ETF) that tracks the same index, facilitating the use of these options as a more cost-effective tool for trading and hedging.

By enabling a similar approach to covered calls with index options, traders can now write options like the Mini S&P 500 Index option (XSP) against ETFs such as the iShares Core S&P 500 ETF (IVV), SPDR S&P 500 ETF Trust (SPY), or Vanguard S&P 500 ETF (VOO).

Lowering the costs associated with overwriting options strategies

The move change aims to lower the costs associated with overwriting options strategies, enhancing the capital efficiency and flexibility of trading as it frees up capital and allows investors to pursue other market opportunities more effectively.

Cboe offers a proprietary suite of index options, including exclusive options on S&P Dow Jones, FTSE Russell, MSCI indexes, and the Cboe Volatility Index (VIX). These options are cash-settled and European-style, which simplifies position management by eliminating the risk of early exercise.

The margin relief rule offers enhanced margin treatment when writing, or selling, a cash-settled index option in a margin account against an ETF that is based on the same underlying index.

The change, which aligns with a similar rule adopted by FINRA, applies to any index call or put option written against a position in a non-leveraged index mutual fund or ETF that is based on the same index and held in the same margin account.

“Additional way for investors to incorporate cash-settled index options”

Catherine Clay, Head of Global Derivatives at Cboe Global Markets, said: “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.

“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.”

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