Options trading has never been more popular, as the past several years have shattered records for options contracts traded. And the latest development by the Chicago Board Options Exchange (CBOE)—nano options—may be another step to help this trend continue.
What are nano options?
Nano options, which you may also see referred to as micro-sized options, are options that are a fraction of the size of current S&P 500 options. The primary purpose of these options is to allow traders or investors to speculate or invest in the direction of the S&P 500 more easily by using less money compared with existing options.
To help you better understand nano options and what is unique about them, let's quickly review the basic features of traditional index options.
A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks. The goal of a call buyer is to profit from an expected short-term price increase in a stock or market index. On the other hand, the seller of the call has the obligation to deliver the stock if assigned by the buyer.
For instance, 1 ABC Index 500 call option gives the owner the right to buy ABC Index at $500 (multiplied by 100, because 1 contract means you multiply the strike price by 100). This ratio is known as the options multiplier (see sidebar). The total purchase price here for 100 shares of the underlying index would be $50,000, regardless of the market price of ABC Index, until the option's expiration date. If you bought 10 ABC Index 500 call options, the total purchase price would be $500,000 ($500 x 10 x 100).
Puts are the opposite of calls. The buyer of a put has the right to sell a stock at a set price until the contract expires. The goal of a put buyer is to profit from an expected short-term price decline in a stock or market index. On the other hand, the seller of the put has the obligation to buy the stock or index if assigned by the buyer.
Nano options up close
Smaller options contracts compared with traditional ones are not new. Nanos are simply 1/100th the size of traditional options.
Here are the key features of nano options:
- 1x multiplier. Traditional options contracts control 100 shares for each contract. Nano options control just 1 share. In many instances, the price of a standard options contract can be a barrier to entry for regular traders, so this lower-stakes options contract trading at lower prices may make it more feasible for some traders.
- Limited strikes with a short expiration date. In addition to having the smallest multiplier of any index contract listed on a US exchange, nano options have an expiration date no more than 1 week out. Normally, options chains have many strike prices and expiration dates. Nano options were designed with simplicity in mind by having a short expiration with a limited number of strike prices. While this may reduce your choices, it may make the decision-making process easier for less experienced options traders.
- Cash settled. There is no delivery of physical shares—nanos are settled in cash. Because nano options are cash settled, they may have potentially favorable tax treatment as capital gains may qualify for the 60% long-term/40% short-term tax rate.*
Comparison of SPX index options
|Description||SPX Index options||Mini-SPX Index options||Nanos S&P 500 Index 0ptions|
|Approximate notional size (with Index values of SPX at 4,400, XSP at 440, and NANOS at 440)||$440,000 (4,400 x $100)||$44,000 (440 x $100)||$440 (440 x $1)|
|Premium dollar price Example: 2-day at-the-money (ATM) option||$3,000||$300||$3|
|Tax treatment||60% long term, 40% short-term capital gains||60% long term, 40% short-term capital gains||60% long term, 40% short-term capital gains|
Source: CBOE, as of 5/9/2022.
Of course, trading or investing using options is not appropriate for everyone. With that said, if you learn about how options work and the risks involved, they may help you implement your strategy. Nanos offer a lower cost way to speculate or invest in the market with relatively simpler options choices.