Q&A: Outcome-Related Options and the Future of Defined-Risk Trading

The call for simplified, defined-outcome financial products has grown sharply in recent years, fueled by the popularity of prediction markets and event-based trading platforms. Nasdaq recently filed with the SEC to list and trade Outcome-Related Options (OROs) on its MRX exchange. To better understand OROs and Nasdaq’s involvement with them, we spoke with Stephen O’Connor, Head of Index Options Strategy and Analytics.

Can you give us a big-picture overview of outcome-related options and why Nasdaq is interested in them?

Stephen O’Connor: There's been a lot of excitement around event contracts and other defined-outcome products that are often called binaries. The payout structure is straightforward, and it can be applied to current events, sports, and the financial markets.

At Nasdaq, we’re focused on contracts related to the financial markets, more specifically, the Nasdaq-100 (NDX). It's our crown jewel index. It's grown tremendously, it has a lot more growth ahead of it, and bringing retail investors into trading one aspect of that index using a product that already feels familiar to them is really what's behind this.

What exactly is Nasdaq proposing to list?

Stephen O’Connor: Nasdaq MRX has filed to list and trade Outcome-Related Options tied to the Nasdaq-100 Index. The filing references XND, which is simply a 1/100-scale version of our larger NDX index product. What matters is that these contracts are tagged to the closing settlement value of the Nasdaq-100.

Why is Nasdaq proposing this now?

Stephen O’Connor: We've watched the rise of these products on unregulated markets, and it's become clear that there's strong demand for contracts that look and feel as though they belong on a regulated exchange like ours. We know the popularity of our own index, and realized that it’s important for investors to have access to OROs in an environment with real protections—more transparency, more safeguards, and a broader ecosystem for all market participants to explore.

How do outcome-related options differ from existing Nasdaq-100 options?

Stephen O’Connor: With outcome-related options, the risk is defined. There is always a strike price, and the payout is either zero or one, depending on whether that threshold is met at expiration. Standard options are different: The value at expiration can be zero, or it can be any amount determined by the difference between the strike price and the settlement value of the index.

With standard options, depending on whether you're long or short, your upside or downside can be unlimited. That's not the case here. With OROs, the maximum gain or loss per contract is limited to the difference between the price the contract was bought or sold and it's settlement value. With a contract multiplier of 100, the maximum gain or loss from one contract is limited to $100. That limited risk and known outcome structure is what makes these products easier to understand and attractive to certain investors.

What distinguishes Nasdaq's OROs from unregulated or offshore products in this space?

Stephen O’Connor: First and foremost, it's the integrity of our markets, and the size and reputation of Nasdaq and U.S. regulated markets more broadly. The scale is many orders of magnitude larger than unregulated, sometimes offshore exchanges. The stability and confidence that the Nasdaq franchise brings to this product adds a level of legitimacy to outcome-related options that I don't think can be matched elsewhere.

These products will be subject to SEC oversight and FINRA surveillance—the same trusted regulatory infrastructure that investors are already accustomed to. That's the foundation of why U.S. markets are as large and liquid as they are, and OROs will be traded within that same framework.

What position limits are being put in place?

Stephen O’Connor: Position limits are a standard safeguard put in place by regulated exchanges to ensure that markets remain fair and orderly. We've started with a relatively conservative position limit of 25,000 contracts on either side of the market. We'll review that limit over time and, based on the product's popularity and liquidity, we may file with the SEC to extend it.

Is Nasdaq considering expanding OROs to other underlying assets, like single stocks, ETFs?

Stephen O’Connor: Our immediate priority is the Nasdaq-100. That's the focus. Other financial products may follow depending on how this rollout goes. We view this as an iterative process; we'll listen to feedback from investors and market participants and react accordingly.

How is Nasdaq thinking about protecting and educating retail investors about these products?

Stephen O’Connor: As with all products on our platform, retail investors access OROs through broker-dealers who have their own disclosure requirements. This ensures customers are familiar with what they're trading.

Beyond that, we are committed to an ongoing and in-depth education effort. We want to help investors understand what the ORO payout structure looks like compared to standard options, and how they're complementary to the broader set of products we offer.