Understanding Index Options

What is an index option?

Index options provide a way to trade based on the movement of a market index, such as the S&P 500 (SPX) or Nasdaq 100 (NDX). These options are cash-settled at expiration, meaning there's no need to deliver or receive underlying assets. Instead, settlement is based on the difference between the option's strike price and the final value of the index. For more information about index options, please see the terms below:

Cash-settled options

A cash-settled option provides a cash payout upon expiration or exercise, rather than physical delivery of the underlying security. The cash settlement amount is calculated by subtracting the strike price from the exercise settlement value and multiplying the result by a multiplier (typically 100).

• Example (Call Option): For a 100 XYZ cash-settled call option with an exercise settlement value of $105, the cash settlement is $500 [(105-100) x 100 = $500].
• Example (Put Option): For a 100 XYZ cash-settled put option with an exercise settlement value of $95, the cash settlement is $500 [(100-95) x 100 = $500].

European-style options

Most cash-settled index options are classified as European-style, while equity-settled options on individual stocks are typically American-style. European-style options can only be exercised on the expiration date, unlike American-style options, which allow exercise at any point up to and including expiration. This restricted exercise window often leads to lower premiums. Although early exercise isn’t permitted, positions can still be closed before expiration through a standard buy or sell.

AM-settled options

AM-settled options use the exercise settlement value posted about 30 minutes after the market opens on the expiration day. These options stop trading the day before expiration. As a result, the holder is exposed to market fluctuations that may affect the exercise settlement value, potentially altering expected gains or turning them into losses.

PM-settled options

PM-settled options determine their exercise settlement value based on the index price at market close on the expiration day. These options can be traded until market close on the expiration day, mitigating overnight risk since the holder does not have to worry about changes in the index price after the market closes.

Attributes of index options Webull offers

1. For the monthly VIX contracts, if the expiration date falls on an exchange holiday, the expiration date will be move to the next available business day after the Wednesday.

2. VIX options’ last trading day is the day before the expiration date. If there is a scheduled holiday on the day before the expiration date, the last trading day for a VIX option contract will be moved one day forward.

What is the settlement period for cash-settled index options?

For PM settled index options, cash will be credited to your account the next business day after the settlement date. For AM settled index options, cash will be credited on the expiration date once the settlement index value is received.

Option trading entails significant risk and is not appropriate for all investors. Option investors can rapidly lose the entire value of their investment in a short period of time and incur permanent loss by expiration date. You need to complete an options trading application and get approval on eligible accounts. Please read the Characteristics and Risks of Standardized Options and Option Spread Risk Disclosure before trading options.