: Interested in trading options but think it’s too expensive? Check out Cboe’s Mini Index Options, XSP & MRUT & how you can start option trading with a smaller portfolio
Building a smaller account can be a thrilling adventure, full of promise and opportunity. But it can also be an effort fraught with frustration, as some potentially tantalizing investment paths can seem blocked to those without the current means to employ pricier strategies. For some smaller investors, index options fall under these potentially unobtainable approaches. “Nice idea, but I can’t afford it, right now,” they tell themselves. “Maybe someday.” Maybe.
Or maybe someday is today.
Before exploring this topic, it’s important to note that options trading entails significant risk and is not appropriate for all investors. TD Ameritrade and Cboe are separate, unaffiliated companies and are not responsible for each other’s policies or services.*
The relative affordability of an investment strategy is just a fact of life for the self-directed investor. And as traditional index options are derived from comparatively higher-value underlyings, they can be prohibitively expensive for some. For this reason, Cboe Global Markets, Inc. (Cboe) created investment vehicles designed to make options accessible to the smaller portfolio. These options are known as “Minis.”
Take, for example, the Cboe Mini-SPX contract. This contract, known and charted by its symbol XSP, is an index options product designed to track the underlying S&P 500 Index. The construction of XSP is straightforward: It tracks at exactly one-tenth the size or value of the SPX, and its options are priced accordingly (see Figure 1). To explore this a little further, let’s suppose SPX is currently at a level of 4500, and its at-the-money (ATM) call is trading at $50. With an options multiplier of 100, a single contract would represent a $5,000 investment for the call buyer, which may price out many smaller accounts. In this event, the XSP may offer a more affordable alternative, as it will be valued at precisely one-tenth of SPX, or 450, and its ATM call will be exactly one-tenth the price of the SPX call, or just $5 in this case. Cboe’s Mini-Russell 2000 (MRUT) options are similar at one-tenth the size of the Russell 2000 Index options (RUT). So, as you can see, Minis can provide greater flexibility for newer index option traders or traders managing a smaller portfolio.
FIGURE 1: The top section shows the SPX, while the bottom is the Cboe Mini-SPX contract, charted by the symbol XSP. Chart source: the thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
While options trading involves unique risks and is definitely not suitable for everyone, if you believe options trading fits with your risk tolerance and overall investing strategy, TD Ameritrade can help you pursue your options trading strategies with powerful trading platforms, idea generation resources, and the support you need.
Learn more about the potential benefits and risks of trading options.
Cboe’s Mini-S&P 500 Index (XSP) options offer investors a way to trade large-cap U.S. stocks and to mitigate portfolio risk with a smaller contract size. As these contracts are one-tenth the size of SPX index options, they are generally the same size as comparable ETF options. But Minis also carry a couple potential advantages versus their ETF counterparts. First, Minis are cash-settled, so there’s no risk of unwanted delivery of physical shares. Second, Minis are European-style options, so there is no possibility of early exercise. And finally, Minis have the potential for more favorable tax treatment, and capital gains may qualify for the 60% long-term, 40% short-term tax rate**.
Now, in addition to these unique attributes, Minis also share many of the familiar characteristics of ETF index options, such as being PM-settled, trading Monday through Friday, and having standard, weekly, and end-of-month expirations.
In addition to offering Minis on the S&P 500, Cboe has also created a vehicle for those looking to leverage or hedge the movements of smaller-capitalization companies. Many investors look to the Russell 2000, or RUT, to gauge the movements of small caps, as this index is comprised of 2,000 smaller U.S.-based companies. Some traders will employ RUT options in an effort to take advantage of their personal convictions regarding small-company behavior. However, as with SPX options, RUT contract prices may exceed the position tolerances or budgets of smaller accounts. Fortunately, these investors now have the option to turn to the Cboe Mini-Russell 2000, or Mini-RUT, which is charted by the symbol MRUT. Just like the Mini-SPX, the Mini-RUT, and its options track at exactly one-tenth of their associated index value, delivering affordability and flexibility to a wider audience of traders and permitting self-directed investors access to derivatives of companies both large and small.
It is important to note that Mini contracts – while potentially appealing to some for their downsized cost – carry similar risks to those associated with their full-size cousins, and the would-be investor needs to prepare accordingly. For example, investment in a long Mini contract does come at one-tenth the cost of a traditional contract, but even that smaller purchase is still potentially exposed to 100% loss, just like a full-size option, should the Mini contract reach expiration out-of-the-money. Similarly, time decay diligently chews away at the extrinsic value of Minis proportionately to their size for the duration of the contract period, and an in-the-money contract can expose an investor to additional risk at expiration, just as with a traditional option. And of course, the leverage that may attract an investor to Minis can also work to that trader’s detriment, should the underlying behave in a manner opposite to the trader’s expectations. So, yes, risk is still a vital consideration when weighing the potential for employing Mini options contracts in one’s self-directed portfolio.
Mini index options products can be used by option traders to gain exposure to a segment of the listed options market traditionally dominated by large account owners and institutional portfolio managers. However, there is still so much more to learn before these strategies might be intelligently implemented: What are the risks of trading Mini index options? What might be some of the fundamental or technical considerations when planning a trade? When might an investor employ a Mini as a hedge, and how might it be used for leverage? And even, how is the order entered?
TD Ameritrade has recently worked with Cboe to create and offer an entirely free, three-part video series dedicated wholly to the understanding of Mini index options. This series features TD Ameritrade Education Coach James Boyd, alongside Henry Schwartz, Senior Director and Head of Product Intelligence at Cboe. The discussion focuses on concepts and strategy considerations for Mini index options trading and how these products might provide greater flexibility for new index option traders or traders managing smaller, individual portfolios. Topics addressed in the series include market dynamics and use case examples, how to enter trades on the thinkorswim platform, position management considerations, and pitfalls and risks of trading Mini index options.
You can watch the webcast series here:
Do Not Sell or Share My Personal Information
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.
*Readers should understand that TD Ameritrade was compensated by Cboe for the preparation of this article, which is not intended to be used in connection with the offering for purchase or sale of any product. The information in this article is for informational purposes only and no statement within this article should be construed as investment advice or a recommendation to buy or sell a financial product. TD Ameritrade and Cboe make no representation as to the appropriateness of XSP or MRUT options for any investor. Neither TD Ameritrade nor Cboe assume any responsibility for any losses you might suffer by reason of investing in XSP or MRUT options.
**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 options 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.
Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.