Index options let you trade broad market exposure without dealing with individual stocks. SPX, NDX, and RUT are among the most popular index options, offering unique features like cash settlement, European-style exercise, and potential tax advantages.
What Are Index Options?
Index options are options contracts based on a stock market index rather than an individual stock or ETF. The underlying is a calculated value representing a basket of stocks, not a tradeable security itself.
Key difference: You cannot buy or sell an index directly. Index options settle in cash based on the index value, not by delivering shares.
Major Index Options
SPX - S&P 500 Index Options
Underlying: S&P 500 Index
Multiplier: $100
Exercise: European style (expiration only)
Settlement: Cash settled
Trading hours: Extended hours available
NDX - Nasdaq-100 Index Options
Underlying: Nasdaq-100 Index
Multiplier: $100
Exercise: European style
Settlement: Cash settled
Notable: Tech-heavy exposure
RUT - Russell 2000 Index Options
Underlying: Russell 2000 Index
Multiplier: $100
Exercise: European style
Settlement: Cash settled
Notable: Small-cap exposure
Key Features of Index Options
Cash Settlement
When index options expire in-the-money, you receive cash equal to the intrinsic value rather than shares:
- No stock delivery or assignment of shares
- Simpler position management
- No need for capital to buy shares on exercise
- Settlement value determined by Special Opening Quotation (SOQ) or closing price
European Style Exercise
Most index options can only be exercised at expiration:
- No early assignment risk
- Predictable position management
- Ideal for premium-selling strategies
- No dividend-related early exercise concerns
Extended Trading Hours
SPX options trade nearly around the clock on CBOE:
- Regular session: 9:30 AM - 4:15 PM ET
- Global Trading Hours: 3:00 AM - 9:15 AM ET
- React to overnight developments
Settlement Methods Explained
AM Settlement (Standard Monthly)
Standard monthly SPX and NDX options settle based on the opening prices on expiration morning:
- Settlement value calculated from Special Opening Quotation (SOQ)
- SOQ uses opening prices of all index components
- Can differ significantly from previous close
- Gap risk on expiration morning
PM Settlement (Weeklies and Some Others)
Weekly index options and some other expirations settle based on closing prices:
- Settlement value based on 4:00 PM closing price
- More predictable for traders watching throughout the day
- SPXW (weekly SPX options) use PM settlement
Know your settlement: AM settlement can result in surprises if the market gaps on expiration morning. Always verify which settlement method applies to your options.
Tax Advantages (Section 1256)
Index options qualify for favorable tax treatment under IRS Section 1256:
60/40 Tax Treatment
Regardless of holding period, gains and losses are taxed as:
60% long-term capital gains rate
40% short-term capital gains rate
This blended rate is often lower than short-term rates for active traders.
Additional Tax Features
- Mark-to-market: Positions are marked to market at year-end
- Loss carryback: Can carry losses back 3 years
- No wash sale rules: Section 1256 contracts are exempt
Note: Always consult a tax professional for advice specific to your situation.
Index Options vs ETF Options
Both track similar markets but have important differences:
| Feature | SPX (Index) | SPY (ETF) |
|---|---|---|
| Settlement | Cash | Physical |
| Exercise Style | European | American |
| Size | ~10x larger | Standard |
| Tax Treatment | 60/40 | Regular |
| Early Assignment | No | Yes |
Mini Index Options
For traders wanting smaller positions, mini versions are available:
XSP - Mini-SPX
- 1/10 the size of SPX
- Cash settled, European style
- Same 60/40 tax treatment
- More accessible position sizes
MNX - Mini-NDX
- 1/10 the size of NDX
- Similar features to full-size NDX options
- Lower capital requirements
Trading Strategies for Index Options
Iron Condors and Credit Spreads
Index options are popular for premium-selling strategies because:
- No early assignment risk
- Cash settlement simplifies management
- High liquidity in SPX
- Diversified exposure reduces single-stock risk
Portfolio Hedging
Index puts can hedge broad market exposure:
- SPX puts protect against S&P 500 declines
- No basis risk if portfolio closely tracks the index
- Cash settlement means no stock delivery complications
Track Your Index Options
Pro Trader Dashboard helps you monitor and analyze your index options positions alongside your other trades.
Liquidity Considerations
Liquidity varies across index options:
SPX - Highest Liquidity
- Tightest bid-ask spreads
- Massive volume daily
- Multiple expirations with good liquidity
NDX and RUT - Good Liquidity
- Wider spreads than SPX
- Best liquidity near at-the-money strikes
- Monthly expirations most liquid
Important Considerations
Position Size
Index options are large. One SPX contract at 4,500 represents $450,000 notional value. Size positions appropriately.
Settlement Risk
AM settlement on monthly expirations can result in settlement values far from the previous close. Manage positions before expiration if this concerns you.
Margin Requirements
Index options often have higher margin requirements due to their size. Verify your broker's requirements before trading.
Summary
Index options like SPX, NDX, and RUT offer unique advantages including cash settlement, no early assignment (European style), potential tax benefits, and broad market exposure. They are popular for premium-selling strategies and portfolio hedging. The main trade-offs are larger position sizes and settlement timing considerations. Understanding these features helps you decide when index options are appropriate for your trading strategies.
Learn more about ETF options trading and European vs American options.