Harness the Power of the Nasdaq-100 Index Using Options

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What is the Nasdaq-100 Index?

The Nasdaq-100 Index tracks 100 of the largest non-financial companies that are listed on the Nasdaq. Fluctuations of the securities determine the changes of the index value, providing a measure of performance. Uniquely, the Nasdaq-100 comprises category-defining companies at the forefront of innovation across Technology, Communication Services, Industrial, and Health Care sectors.

What is an Index Option?

An index option is an option listed on the index, which provides the holder of the option direct exposure in a simple and efficient contract. Instead of buying the stocks within the Nasdaq-100 index, investors can simply utilize index options, such as NDX or XND, to gain exposure to the Nasdaq-100. Investors will typically use Index options to speculate with limited risk, generate income, and hedge a portfolio against a market downturn. Additionally, there are also ETF options listed on the Nasdaq-100 index; however, index options provide advantages over ETF options that we will explore in this post. However, with the launch of the XND, the Nasdaq-100 Micro Index Option, investors can now benefit from the efficiency of index options in a retail-friendly size.

Index Options Characteristics

Investors have a choice when accessing exposure to an index using options with either an ETF or index option. However, Index options can provide a distinct tax advantage and risk reduction around assignments and expirations. Firstly, index options are taxed with the 60/40 Rule, with 60% at long-term capital gains and 40% at short-term. For investors trading in a taxable account, this is favorable to utilizing index options when seeking exposure. Additionally, for investors, trading strategies, including a short option, present both assignment and expiration risk. However, index options that are European style cannot be exercised early, eliminating assignment risk. Moreover, the cash settlement process for index options avoids exercise risk, reducing transaction costs related to closing 'Out of the Money' options. These advantages are unique to index options and provide investors with both a reduction in risk and a potentially lower tax bill.

Harness the Power of the Nasdaq-100 Index using Options

Harness the power of the Nasdaq-100 Index

Source: OptionsPlay

Popular Trading Strategies using Index Options

With the exclusion of assignment risk, index options are very popular with option sellers. Credit Vertical Spreads and Butterfly/Condor trades are some of the most active strategies traded on index options such as the Nasdaq-100 Index. Traders speculating on the directional view of the Nasdaq-100 index can trade a Debit Vertical Spread and reduce the overall risk versus buying a long call or put. Lastly, portfolio managers and investors typically use index options to hedge portfolio risk with a Long Put or Put Spread against market downturns.

Introducing XND - Nasdaq-100 Micro Index Option

Due to their growth over the years, major indexes such as the Nasdaq-100 are now trading at substantially higher values. This growth has resulted in the index and even ETF options contracts being sizable and too expensive for many retail traders. However, the new XND Index option's launch allows investors to gain exposure to the Nasdaq-100 in a retail-friendly size. XND is a reduced value Nasdaq-100 index that trades at 1/100 of the value and compares to an ETF priced at $130. XND now merges the sizing flexibility that ETF options typically provide with the benefits of Index options.

To learn more about the launch of XND, don’t miss our Introduction to Trading Index Options webinar. Watch the event replay here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Tony Zhang

Tony Zhang is a specialist in the financial services industry with over a decade of experience spanning product development, research and market strategist roles across equities, foreign exchange and derivatives. As the current Chief Strategist for OptionsPlay, Tony currently leads the research and development of their OptionsPlay Ideas & Portfolio platform. He has leveraged his interest in financial technology and product development to provide innovative reimagined solutions to clients and the users they seek to serve. Previously, he spent 7 years at FOREX.com with a capital markets and research background as a market strategist specializing in equity and FX derivatives markets.

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