Options to Outperform

With an NDX index option contract, cash is delivered (instead of the asset) at expiration. This can make it easier to manage contracts around expiration dates since investors don’t need to have a closing position prior to the expiration. In addition, there’s no risk of forced delivery.

Most equity options are American style, meaning they can be exercised at any point prior to expiration. European style is the opposite. These types of contracts can only be exercised upon expiration. Why does this matter? American-style options can carry higher costs to account for the fact that sellers take on more risk by not knowing when a buyer might decide to exercise their contract. Sellers of European-style options don’t have early assignment risk.

Index options benefit from a more favorable tax treatment: 40% of any gain (or loss) is taxed at the short-term capital gains rate, and 60% is taxed at the appropriate long-term tax rate. This 60/40 split is applicable even if the index option is held for less than a year.

Equity and index options both typically expire on the third Friday of the expiration month, but index options offer greater flexibility by allowing for AM and PM expirations. NDX has Monday, Wednesday and Friday PM expirations, as well as AM expirations for traditional third Friday monthly options.