ETF Options vs. Index Options
Index options and ETF options—especially those that track broad market indices like the S&P 500 or the Russell 2000—are very similar. With one trade market participants can gain broad market exposure, hedge their portfolios, or execute a variety of trading strategies. Cboe’s Mini index options offer very similar notional size, weekly expirations, and PM-settlement like the most popular corresponding ETF options. But there are a few key differences that traders should keep in mind.
What's the Difference: ETF Options vs. Index Options
Traditionally, index options have been used by big institutional money managers because of their large notional size and retail traders have gravitated toward smaller ETF options. But with the introduction of Mini index options individual investors can now trade the same contracts as the institutions and access the same benefits. So, what's the difference?
Different Tax Treatment
Capital gains are considered short-term gains and taxed at the ordinary income rate.
Even if held for less than a year, capital gains may qualify for 60% long term/40% short-term tax rate so you can keep more of your trading profits.*Learn More
Cash Settlement vs. Share Settlement
Delivered in physical shares of the underlying ETF, resulting in meaningful market exposure if held until expiration.
Credited/debited in cash so there's no unwanted delivery of shares or market exposure.Learn More
American vs. European Style Options
American style and can be exercised at any time on or before expiration. May pay a dividend and assignment could occur going into an ex-dividend date, leaving the seller to pay the dividend.
European style and can only be assigned at time of expiration. Index options do not pay a dividend.Learn More
*Under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded options and futures are entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the Tax Code. Investors should consult with their tax advisors to determine how the profit and loss on any particular option or futures strategy will be taxed and should be reported for tax purposes. Tax laws and regulations change from time to time and may be subject to varying interpretations. No representation is made regarding tax consequences or tax reporting requirements.
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of "Characteristics and Risks of Standardized Options." Copies are available from your broker or from The Options Clearing Corporation at 125 S. Franklin Street, Suite 1200, Chicago, IL 60606 or at www.theocc.com.
Past performance is not indicative of future results. The information in this article is provided for general education and information purposes only. No statement(s) within this article should be construed as a recommendation to buy or sell a security or future or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this article is available by contacting Cboe Global Markets at cboe.com/contact.