Mini S&P Index Options (XSP)
Recently, the CBOE released a new product, Mini S&P Index
Options (XSP). These are options on the S&P 500 index that are priced at 1/10
the value of the SPX options. In this article we will explore why these options
were created and which traders can potentially make the best use of them.
Currently you can trade options on the S&P 100 index using the
OEX option. And if you want to trade the action in the Nasdaq, you can NDX
options or QQQQ options. Plus, you can already trade the movement in the S&P 500
through SPX option. The obvious question that traders might ask is, “With all
these choices available, what is the need for another S&P-based option?”
To get at the crux of that question, let’s take a look at the
manner in which individual traders use index options. There are essentially two
ways in which index options are commonly used:
1. They are employed in a options strategy to trade movement
in an index.
2. They are used hedge a portfolio.
In the first scenario, a trader is looking to use any of a
number or strategies such as buying calls or puts , or putting on bull or bear
spreads with the goal of making money from movement in the underlying index.
There are many variables that a trader considers in order to decide which
options to use. These variables include: price, volatility, expiration date, and
volatility. More advanced options traders will also consider the “greeks” such
as delta, theta and vega. But, if you ask many options traders what option
they’d choose to use in a directional strategy, the SPX options are not likely
to be at the top of the list. Why? They are relatively expensive compared other
index options such as the OEX and QQQQ options. Most options traders prefer to
buy “cheap” options due to the perception that less expensive options tend to
offer better leverage. For example, at the time of this writing the December
1250 calls are trading at $14.00 ($1400).
In the second case of using options to hedge a portfolio, if
you ask a wide spectrum of traders, which index options they’re likely to use,
they’ll have different answers for you depending upon the size of the portfolio
they’re hedging. For large institutional investors with portfolios that contain
a large percentage of S&P 500 stocks, the SPX can be a good choice. If the
current price of the underlying S&P 500 index is 1255, then one SPX put option
hedges a portfolio of $125,500 (1255 X 100). For smaller investors with much
smaller portfolios, however, the SPX options are going to be problematic. If an
investor has a $30,000 that is heavily weighted toward S&P 500 stocks, buying a
SPX put option doesn’t make much sense.
To address these two scenarios, the CBOE recently launched the
Mini S&P 500 Index Options
(
XSP |
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Chart |
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PowerRating), which price at 10% of the SPX’s value. So
if the SPX is trading at 1255, the XSP index will be trading at 125.50. And this
is a constructive development for the two types of options traders we are
discussing.
For the trader who is attempting to use an options
strategy in order to make money from the movement of
the underlying S&P 500 index, the XSP will be appealing from a pricing
standpoint. At the time of this writing, the at-the-money December 125 calls are
trading at 1.25 ($125). This is a price level that appeals to options traders.
And what about the individual investor who is hedging a small
S&P weighted portfolio against adverse moves? With the XSP, one put option will
hedge a portfolio that is worth $12,500 if the index is trading at 125.00. These
are numbers that are within reach of the average investor.
In addition to a price scaling that fits the needs of
individual investors, there’s another bonus to the XSP. The XSP uses a European
style expiration, which means that it can be exercised on the day before
expiration. This is an advantage to XSP traders because it means if you hold an
option that is in-the-money, your trading cannot be interrupted by someone
exercising their options until the day before expiration.