Discover the Benefits of Mini-SPX (XSP) Index Options

Matt Moran

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September 27, 2021

The Mini-SPX Index (XSP) options contract is 1/10 the size of the standard SPX™ options contract, providing greater flexibility for new index options traders, as well as traders managing an individual portfolio or portfolios for several accounts. Open interest in XSP Index options is increasing as market participants seek exposure to and hedging for the S&P 500™ Index. We’re exploring use cases and strategies that may be beneficial to both new and more experienced options traders.

Open Interest for XSP Index Options on September 1, 2021

Source: Cboe Global Markets

Benefits of XSP Index Options

Trade a Smaller Size | Greater flexibility at 1/10^th the size of a standard contract
Cash Settlement | No unwanted delivery of physical shares as settled to cash
European Exercise | No risk of early assignment – can only be assigned at expiration
60/40 Tax Treatment | Keep more of your trading profits. Capital gains may qualify for 60% long-term/40% short-term tax rate^*
Covered Margin Treatment | If trading in margin account, offset a cash-settled index option short position with the equivalent position of the same underlying index-tracking ETF^**

XSP Index Options Term Structure

The implied volatility estimates for XSP Index options at 90% moneyness with expirations in one week and two weeks are 32.4 and 29.1, respectively. The 10% out-of-the-money (OTM) XSP Index options puts are at 90% moneyness and can be used for hedging of U.S. stock portfolios.

Term Structure for XSP Index Options at the Close on September 2, 2021

Source: Cboe Global Markets

Strategy Idea: Calendar Spreads Using XSP Index Options

In times when volatility is becoming more mean-reverting, relatively steep slopes in the term structure may become flatter. The calendar spread strategy may be useful for market participants who expect a change in a steep term structure in the near future. This strategy involves buying and selling a call option (or buying and selling a put option) with the same strike price but with different expiration dates. Experienced option traders can use market-neutral calendar spreads to trade horizontal volatility skew (different levels of volatility for different expirations), to limit exposure to delta and take advantage of the accelerating rate of theta time decay.

XSP Index Options Volatility Skew

Over the course of 33 expiration dates, out-of-the-money XSP Index put options generally had higher implied volatilities than out-of-the-money call options.

Volatility Skew for XSP Index Options

Source: Cboe LiveVol Pro

Strategy Idea: Vertical Put Spreads Using XSP Index Options

The Vertical Put Spread strategy may be useful for market participants who are intrigued by the skewness that often accompanies index options. This strategy involves selling a put and simultaneously buying another put at a different strike price, but with the same expiration.

Additional Resources

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