Cboe Launches Margin Relief Rule for Cash-Settled Index Options

Cboe Global Markets, a derivatives and securities exchange network, has announced enhanced margin treatment for cash-settled index options, as well as a new margin relief rule intended at improving traders’ capital efficiency.

The new margin rule improves margin treatment when selling cash-settled index options against an exchange-traded fund (ETF) tracking the same index, making these options a more cost-effective instrument 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).

Previously, there was no margin requirement for a short call that classified as “covered.” Given the similar risk/return profiles of writing an index call option (such as XSP) against a long ETF position (such as IVV, SPY, or VOO) versus writing a covered call, Cboe’s rule now considers these index options to be protected for margin purposes and exempts them from uncovered option margin requirements.

The rule is applicable to any index call or put option written against a position in a non-leveraged index mutual fund or ETF based on the same index as the index option and held in the same margin account. FINRA recently established a margin relief rule that is comparable to Cboe’s.

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