Options on an index like the Nasdaq-100 (ticker symbol NDX) are incredibly useful. They can be used to express nearly any market outlook from very bullish to moderately bullish, to sideways, to any degree of bearishness.
The Nasdaq-100 index includes the most important non-financial companies listed on Nasdaq. Nasdaq-100 options are options on the actual index value itself so they’re a bit different than traditional options on something like the popular Nasdaq-100 ETF, ticker symbol QQQ. These differences can make NDX options particularly useful.
The differences between traditional options and index options focus on what happens at settlement. Traditional options are settled by delivery of shares of the underlying stock or ETF. In the case of QQQ, if a call option is in-the-money at expiration the owner of the call option will exercise that option and receive 100 shares of QQQ and will pay the exercise price of the option for each share. The seller of the call option is obliged to deliver the shares and accept the strike price as payment. The owner of the call option could exercise the option at any time, including prior to expiration.
If a QQQ put option is in-the-money at expiration the owner of the option will exercise the option and deliver 100 shares of QQQ and will receive the exercise price of the option for each share. The seller of the put option is obliged to take receipt of the shares and pay the strike price as payment. The owner of the put option could exercise the option at any time, including prior to expiration. This is how all “traditional” options work at expiration and settlement.
Index options operate differently for one primary reason. While it is simple to deliver or receive 100 shares of QQQ, delivering the actual Nasdaq-100 index, meaning delivering all the shares in the correct weighting would be enormously unwieldy and would require delivery of fractional shares. So index options are settled in cash, rather than through the delivery of shares.
Index options like options on the Nasdaq-100 are “cash settled” against a final settlement value for the index. Nasdaq-100 options which settle on the third Friday of each month use ticker symbol NDX and expire at the open of trading on that third Friday. The final settlement value for these options is calculated at the open of trading on the expiration date and incorporates the official opening price that day for each of the component securities. The ticker symbol for this final settlement value is XQO (think of “O” for “Open”).
Nasdaq-100 options which settle on Fridays other than the third Friday of the month use ticker symbol NDXP to distinguish them. These options expire on the close of trading rather than on the open. The ticker symbol for this final settlement value is XQC (think of “C” for “Close”).
At cash settlement of all Nasdaq-100 options, any out-of-the-money option will expire worthless while the owner of an in-the-money option will receive cash equal to the amount by which the option is in-the-money. For example, the final settlement value (XQC) for options expiring on Friday, December 13, was 8487.71. The owner of the 8250 strike call option expiring on that day would have received cash since her call option was in-the-money. Since these call options were in-the-money by 237.71 points (8487.71 minus 8250) the amount of cash received per call option would have been $23,771 (237.71 multiplied by the $100 multiplier shared by all options on the Nasdaq-100 index). That money would have come from someone short that option at expiration.
Similarly, someone long the 8500 strike put option would receive $1,229 (8500 minus 8487.71 with that difference multiplied by the $100 multiplier).
While cash settlement is quite different than traditional settlement it’s also much easier. Someone long a call option doesn’t have to worry about making payment, taking delivery, and then making a decision about keeping or selling the stock. Someone short a covered call option, which we discussed in a previous post, doesn’t have to worry about having appreciated stock called away and having a taxable event other than the option trade. Similarly, for one buying Nasdaq-100 put options as insurance, cash-settled options work more like insurance than traditional options since any loss will be satisfied in cash rather than by surrendering a portfolio which might also result in a taxable event.
And cash settlement makes Nasdaq-100 options particularly useful for spreads and other combination trades. We’ll cover some of these in upcoming posts.
Cash settlement not only makes index options possible, it can be a distinct advantage for many users.
Nasdaq publishes articles about important aspects of the NDX option market each Monday and Thursday. Check back here for our latest post.
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Performance of an index is not illustrative of any particular investment. Index returns quoted represent past performance which is no guarantee of future results.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.