Quick Answer
An index option is an option on a broad-based, narrow-based, micro narrow-based or other index of equity securities prices, and its aggregate exercise price is the exercise price times the index multiplier. Volatility index options settle to a Special Opening Quotation on the date the rule or option symbol identifies, usually a Wednesday, and expire that same day.
Index options currently traded settle in cash against a calculated value rather than a delivered security, so the settlement date, the settlement calculation and the last trading day are all written into the rules. Volatility index options get their own set of them.
What Is an Index Option, and How Is Its Aggregate Exercise Price Calculated?
The Cboe definitions state that an index option means an option on a broad-based, narrow-based, micro narrow-based, or other index of equity securities prices.
The same definitions give the aggregate exercise price two branches. It means the exercise price of an option contract multiplied by:
- For equity options, the number of units of the underlying security.
- For index options, the index multiplier for the underlying index covered by the option contract.
The Cboe index option definitions then define the multiplier itself. The index multiplier is the amount specified in the contract by which the current index value is to be multiplied to arrive at the value required to be delivered to the holder of a call or by the holder of a put upon valid exercise of the contract.
Exam Tip: Gotchas
- The aggregate exercise price formula changes with the product. An equity option multiplies by units of the underlying security; an index option multiplies by the index multiplier, and a scenario that applies share counts to an index option is using the wrong branch.
- The multiplier definition names both directions. It is the amount that produces the value delivered TO the holder of a call and BY the holder of a put on a valid exercise.
How Does Cboe Classify an Index?
Three classifications matter, and two of them are pairs of words meaning one thing.
| Term | Definition |
|---|---|
| Broad-based index and market index | One term. An index designed to be representative of a stock market as a whole or of a range of companies in unrelated industries |
| Narrow-based index and industry index | One term. An index designed to be representative of a particular industry or a group of related industries, and including indices having component securities that are all headquartered within a single country |
| Micro narrow-based index | An industry or narrow-based index that meets the specific criteria the Cboe index designation rule provides |
The classification drives the position limit, so the same index name will reappear in the lesson on position limits with a contract number attached.
Exam Tip: Gotchas
- A single-country index is narrow-based by definition. The narrow-based definition expressly includes indices whose component securities are all headquartered within a single country, however many companies or industries the index spans.
- Market index is not a separate category. The rules treat market index and broad-based index as one term, so a scenario contrasting the two is contrasting synonyms.
What Is an Individual Stock or ETF Based Volatility Index?
The index option definitions treat this as a named class. An Individual Stock or ETF Based Volatility Index is a volatility index that provides an up-to-the-minute market estimate of the expected volatility of its corresponding underlying stock or exchange-traded fund.
That estimate is calculated by using real-time bid and ask quotes of Cboe Options listed options overlying that individual stock or exchange-traded fund. In a separate sentence, the rule then names the thirteen such indexes that have been approved for trading on the Exchange.
| Approved Individual Stock or ETF Based Volatility Indexes |
|---|
| VXAPL, VXAZN, VXGS, VXGOG and VXIBM, the equity volatility indexes |
| GVZ and OVX, on gold and crude oil |
| VXEEM, VXFXI, VXEWZ, VXGDX, VXSLV and VXXLE, on emerging markets, China, Brazil, gold miners, silver and the energy sector |
Exam Tip: Gotchas
- The definition and the approval roster are two separate sentences. The first sentence defines the class by how the index is built; the second names the thirteen indexes of that class approved for trading on the Exchange, which is an approval roster rather than a closure of the definition.
- The input is quotes, not trades. The estimate is calculated from real-time bid and ask quotes of Cboe Options listed options overlying that stock or fund.
When Is a Volatility Index Option's Exercise Settlement Value Calculated?
The Cboe index option series rule splits volatility index options that measure a 30-day volatility period into two branches, and each branch carries its own holiday proviso.
For a standard, monthly volatility index option other than the Cboe Volatility Index (VIX), such as the individual stock or ETF based volatility index options, the exercise settlement value is calculated on the Wednesday that is 30 days prior to the third Friday of the calendar month immediately following the month in which the option expires.
If that Wednesday, or that third Friday, is an Exchange holiday, the exercise settlement value is calculated on the business day that is 30 days prior to the Exchange business day immediately preceding that Friday.
For a VIX option, the exercise settlement value is calculated on the specific date, usually a Wednesday, identified in the option symbol for the series.
If that Wednesday, or the Friday that is 30 days following that Wednesday, is an Exchange holiday, the exercise settlement value is calculated on the business day immediately preceding that Wednesday.
Exam Tip: Gotchas
- The two branches re-anchor on different dates, and both land earlier. The general monthly branch counts back 30 days from the Exchange business day immediately preceding that Friday; the VIX branch moves to the business day immediately preceding that Wednesday.
- Each holiday test looks at two dates, not one. A holiday falling on the relevant Friday triggers the proviso even when the Wednesday itself is a normal business day.
- A VIX series carries its settlement date in its own symbol. The rule points to the specific date identified in the option symbol, so the Wednesday is a description of the usual case rather than the test.
How Is the Special Opening Quotation Built?
The exercise settlement value of a volatility index option is calculated by the Exchange as a Special Opening Quotation (SOQ) of the applicable volatility index, using the sequence of opening prices of the options that comprise the index.
The rule then handles a series that does not trade. The opening price for any series in which there is no trade is the average of that option's bid price and ask price, as determined at the opening of trading.
One input to that average is fixed in a single case. The ask price equals $0.05 if the series opens with unexecuted sell market orders.
The time input is not a calendar approximation either. The "time to expiration" used to calculate the quotation accounts for the actual number of days and minutes until expiration for the constituent option series, so a delayed opening or an intervening Exchange holiday changes the figure.
Exam Tip: Gotchas
- A constituent series with no trade still supplies a price. The quotation uses the average of that series' bid and ask rather than skipping the series.
- The stated ask price applies in one situation only. It is used where the series opens with unexecuted sell market orders, not as a general minimum for every quoted series.
- The time input is measured in days and minutes. A delayed opening reduces it and a holiday can increase it, so the settlement calculation is not a fixed 30-day count.
When Does a Volatility Index Option Expire and Stop Trading?
The expiration date of a volatility index option is the same day that the exercise settlement value of the option is calculated. Settlement day and expiration day are one date, not two.
The last trading day is the business day immediately preceding the expiration date. When the last trading day is moved because of an Exchange holiday, the last trading day for an expiring option contract is the day immediately preceding the last regularly scheduled trading day.
Cboe treats the Cboe Volatility Index as a broad-based index class, and it is one of the classes that carries no position limit and no exercise limit. Those tables are covered in the lessons on position limits and on exercise limits, reports and liquidation.
Exam Tip: Gotchas
- These contracts stop trading before they expire. The last trading day is the business day immediately preceding the expiration date, so a holder who waits for expiration day has no market to close in.
- A holiday shifts the last trading day one further back. It becomes the day immediately preceding the last regularly scheduled trading day, rather than the last scheduled day itself.
- No position limit does not mean no rules. A class carrying no position limit still sits inside the reporting and hedge-documentation requirements covered in the limits lessons.
What Should You Check on Exam Day?
- Confirm the product before computing an aggregate exercise price: units of the underlying for an equity option, the index multiplier for an index option.
- Classify the index first, because broad-based, narrow-based and micro narrow-based each route to a different position limit rule.
- On a settlement-date question, ask whether the option is on the Cboe Volatility Index or another monthly volatility index; the holiday provisos differ.
- Check both dates in the holiday test, the Wednesday and the related Friday, before deciding the settlement day is unchanged.
- Remember expiration day and settlement-calculation day are the same date, and the last trading day is the business day before it.