Following the introduction of Cboe Nano options and Cboe Mini Options earlier this year, Cboe Global Markets Inc. CBOE has added FLEX Micro options to its repertoire of options tailored to the retail community.
FLEX Micro options are derived from FLexible EXchange options (FLEX), which are powerful, customizable portfolio-management tools that allow users to specify key contract terms — like exercise prices, exercise styles and expiration dates — on major stock indexes and individual equities. FLEX options have been around since 1993 and have granted portfolio managers several benefits:
- Customizable contract terms
- Transparency and operational ease
- Reduction of counter-party risk
- Capital efficiency
On June 27, Cboe released FLEX Micro options, which provide all the benefits of FLEX options at a fraction of the cost. With a contract multiplier of 1, rather than the conventional 100, FLEX Micro options provide more precision to hedge a portfolio based on notional value, which may equal a fraction of a standard contract.
Flex Options For Major Indices And Stocks
FLEX Micro options are available for some of the most traded indices in the world, including (SPX®, XSPSM, RUTSM, DJXSM, MXEASM and MXEFSM, as well as individual equities like Netflix Inc. NFLX or Tesla Inc. TSLA.
Assuming an index value of 4,400 for the SPX, a FLEX Micro option would cost $4,400 as opposed to the typical cost of $440,000, making FLEX options far more accessible than their larger counterpart. While traditional options contracts come with fixed strike prices, expiration styles and expiration dates, Flex options allow traders to:
- Choose an expiration date up to 15 years from the trade date
- Choose an exercise style of American (shares-settled) or European (cash-settled)
- Choose a strike price based on the traded security’s price, percentage of its price or other methods
Flex Options could grant portfolio managers greater flexibility and an ability to manage positions with precision.
Flex Options Use Cases
Cboe offers dozens of benchmark indexes designed to show the hypothetical performance of strategies that use FLEX options. Cboe demonstrates, through two examples, that strategies that employ FLEX options can help significantly reduce drawdowns in bearish periods and also provide excess returns during growth periods.
Specifically, Cboe mentions how:
- Traders who used FLEX options on the SPRO index could have significantly reduced drawdowns when compared to traders who simply invested in the SPX.
- Traders who used FLEX options on the SPEN index could have improved their upside potential when compared to traders who simply invested in the SPX.
Cboe concludes that, since its inception, the SPRO has had significantly less volatility than the SPX, and the SPEN has outperformed both large-cap domestic and international equities. Both of these instruments can be used with FLEX Micro options. For more on these examples, click here.
A Final Comparison
Options can be daunting and confusing so cheat sheets are handy. If you’re still having trouble distinguishing between index and equity flex options, check out the table below.
For more depth on FLEX options, click here.
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