Cboe Global Markets, Inc., a leading derivatives and securities exchange network, today announced the introduction of enhanced margin for cash-settled index options.
Cboe’s margin relief rule aims to deliver greater capital return for traders and reflects its ongoing commitment to support smart and responsive market structure improvements that meet the evolving needs of its clients.
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) based on the same underlying index. In the same way that an investor can write an equity call while holding a long position in the underlying security (i.e., a “covered” call), the Cboe’s rule change allows index options to be written in a similar manner.
An investor, for example, could write a call option on the Mini S&P 500 Index (XSP) option while holding a positive position in a corresponding ETF such as the iShares Core S&P 500 ETF (IVV), the SPDR® S&P 500® ETF Trust ( SPY ) or Vanguard S&P 500 ETF ( VOO ) to potentially improve their ETF returns.
Under the previous 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 (eg, XSP) versus a large ETF position (eg, IVV, SPY, VOO) versus writing a covered call, Cboe’s rule addresses now these index options as hedged for margin purposes – and not subject to uncovered option margin requirements. This rule change is expected to allow investors to adopt replacement 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.
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 range of index options are cash-settled (no transfer of the actual underlying asset, instead any profit or loss is exchanged for cash at expiration) and European-style (options can only be exercised at expiration, removing withdrawal risk and facilitating easier management of positions.)
The Cboe rule applies to any index call or put option written against a position in an unleveraged index fund or unleveraged ETF based on the same index underlying the index option and held in the same margin account. FINRA recently adopted a similar margin relief rule that conforms to the Cboe rule.