Index Options 101
What Are Index Options and How Do They Work
Have you heard about index options?
Unlike stock options that are tied to individual companies, these options are based on market indices.
They come with several features:
cash settlements, no early assignment risk, and potential tax advantages, which make them appealing for some traders.
But remember, the stock market is always in flux. A strong understanding of index options is crucial, especially being aware of potential risks.
Let's take a closer look at index options and how you can access them on moomoo.
I. What's an index option?
An index option is a financial contract based on a stock market index, like the S&P 500, which represents the performance of about 500 major companies and reflects the overall US stock market.
Index options let you trade in the direction you expect the entire market to move, whether you think it will rise, fall, or stay relatively stable.
When you trade options on the S&P 500, for example, you're speculating on the general movement of the market, rather than on the performance of individual companies.
Moreover, a broad market index is less vulnerable to company-specific events such as management turnover or financial missteps.
This is because an index is made up of a diverse group of stocks, so the impact of any single company's issues is diluted.
II. Potential advantages of index options
• Broader Market Exposure
• Lowered Volatility and Diversification
Potential to Generate income.
Help Protect your portfolio against declines.
• Tax Efficiency*
60% of gains and losses are considered long-term; 40% are short-term.
Benefit from potentially lower tax rates on returns.
Note: Under section 1256 of the Tax Code, profit and loss on transactions in certain exchange-traded options, including SPX Options, 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 option strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations.
Moomoo offers 10 different sets of index options that encompass the needs of most investors.
Whether you're targeting popular market indexes or seeking specialized options, you can find the right option to match your trading strategy.
III. Index options vs stock and ETF options
Index options differ from equity or ETF options in several ways. Let's examine the potential benefits of trading index options.
Exercise style: European
Settlement type：cash
Unlike stock options that involve the exchange of physical shares, index options are cash-settled because you can't trade the underlying index itself.
At expiration, the option's value is determined by the difference between the strike price and the settlement price, with the resulting profit or loss directly reflected in your account. (See the table below for details.)
Take SPX index options as an example:
If you hold an SPX call option with a strike price of 4,420 and SPX settles at 4432 at expiration, your option's settlement value is calculated as (4432 - 4420) × 100, resulting in a $1,200 profit.
If SPX settles at 4418, the option expires worthless, and the settlement value is $0.
Note: the contract multiplier for SPX index options is 100.
Contract size
The size of an option contract is calculated by multiplying the option's contract multiplier by its strike price.
Generally, index options have a larger contract size compared to ETF options.
60/40 tax treatment
Index options receive favorable tax treatment as they are classified as Section 1256 contracts.
Regardless of how long they are held, 60% of the gains are taxed at the long-term capital gains rate, and 40% at the short-term rate.
Conversely, taxes on equity and ETF options depend on how long they are held. If held for less than a year, gains are taxed as short-term;
if held for over a year, they're taxed as long-term capital gains, which vary based on income.
Since most options are held for short periods, typically under a year, trading index options can offer a tax advantage, with a larger portion of the profits being taxed at the lower long-term rate. However, this benefit does not apply to tax-exempt accounts like IRAs.
IV. How to trade index options
How to access US index options on moomoo?
Pathway 1: Open moomoo and search for the index that you're interested in. Let's use SPX as an example (for eductional purposes only).
Pathway 2: Tap on Markets > Options > Index to view market overview, top indices, and option rankings.
Note: Any app images provided are not current and any securities shown are for illustrative purposes only and is not a recommendation.
How to trade US index options?
Tap on your desired index option to enter its detailed quotes page for trading.
Then you can use features such as Analysis and Unusual Activities to help you make more informed decisions.
The steps for entering a trade for index options are the same as stock options.
On the options chain page, select Call or Put, choose a trading strategy, select an expiration date and price, and tap on the trade button to place your order.
Note: Any app images provided are not current and any securities shown are for illustrative purposes only and is not a recommendation.
V. QA
Trading Hours
Regular trading day:
9:30a.m-16:15p.m ET
Last trading day:
AM-settled index options:
9:30a.m-16:15p.m ET
PM-settled index options: 9:30a.m-16:00p.m ET
Moomoo Financial above trading sessions, moomoo does not support other trading sessions for index options.
Margin Requirements for Index Options Strategies
The follow strategies are eligible for margin requirement reductions：
Vertical Spread
Short Straddle
Short Strangle
Butterfly
Condor
Iron Butterfly
Iron Condor
Long Calendar Spread
Long Diagonal Spread
The rules on margin requirement reductions are the same for index and stock options. For more information, refer to the help article "Margin Requirements for Options Strategies".