Setting the record straight

As the pioneers who introduced listed options five decades ago, you can place your trust in Cboe® to lead the way forward. We’re demystifying the world of options trading, addressing common questions and debunking misconceptions. Whether you’re new to options or looking to enhance your trading knowledge, this page is designed to provide clarity and get you on the right path. Explore our resources and take control of your investment journey with confidence.

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Make Options Work For You

New to Options?

Check out the Options 101 Course from The Options Institute Learn the basics like “puts” and “calls” and more about the benefits and risks of incorporating them into a portfolio.

Get Started

Advanced Options User?

Check out Cboe’s free tools, like the options calculator and trade optimizer, visit the Research Archives or read explainers on Cboe Insights.

Somewhere in the Middle?

Take a look at the the FAQs below or get a refresher on options terms with The Options Institute.

The Options Institute

Getting Started

What is an Option?

Options are contracts, or formal agreements with defined terms that provide the right, but not the obligation, to buy or sell an underlying security at a predetermined price within a specific timeframe.

Listed Options

There are two types of exchange-listed options: puts and calls. Listed options have strike prices and expiration dates set by listing options exchanges like Cboe. Exchange-listed options offer flexibility and choice via two types of contracts: Call: An option contract that gives the owner the right, but not the obligation, to buy the underlying security at a specified price (its strike price) for a certain, fixed period (until, or at the contract’s expiration). Put: An option contract that gives the owner the right to sell the underlying security at a specified price (its strike price) for a certain, fixed period (until, or at the contract’s expiration).

A put and Calls infographic explaining their work.

Why Use Options?

Listed options are a time-tested and valuable investment tool that enable market participants to gain market exposure and manage their risk.

Options allow investors to express different viewpoints, and the flexibility of options offers many potential outcomes including asset protection, reducing investment volatility and income generation.

Protect What You Own

Options can be used to mitigate unwanted outcomes and manage risk effectively. Let’s say an investor owns shares of stock 123 and wants to buy insurance in case 123 stock’s price goes down in value. The investor could buy a put option that limits the amount they may lose. This is like paying insurance premiums for a car or house. You pay a premium to minimize losses if there is unforeseen damage to your property. You may not need to use the insurance, or you may need to replace everything. In either case, the premium you paid for the insurance is the maximum loss you will experience. Options allow investors to protect their portfolios in a very similar way, for a premium that is cost effective and risk appropriate.

Generate Income

Many traders use options to generate income through a covered call writing strategy. This strategy allows a seller to collect a premium (in this case, the amount received) for selling a contract on shares they already own. The seller is “covered” (has the shares available) should the option be in-the-money at expiration and face the risk of assignment.

Efficient Exposure

Options provide exposure to stock performance with less capital. This is thanks to the embedded leverage in an options contract; typically, a standard equity options contract controls 100 shares of stock. Owning and holding shares of stock can be profitable if the stock’s value increases or dividends are received. Options contracts offer a more capital efficient and flexible way to gain more exposure to a stock’s performance.

Share Your Perspective

If an investor expects an underlying stock to increase/decrease in value, they could purchase a call/put option, which grants the holder the right, not the obligation, to buy/sell the underlying asset at certain price within a certain timeframe. Options can be a more flexible way to speculate on price direction than owning the stock outright.

Types of Options

Listed options are a time-tested and valuable investment tool that enable market participants to gain market exposure and manage their risk. Options allow investors to express different viewpoints, and the flexibility of derivatives offers many potential outcomes including asset protection, reducing investment volatility and income generation. 

Index Options

Single Stock Options

ETF Options

Expirations Offered

Weekly^*, monthly, quarterly

Venues Offered

Proprietary products offered by particular exchange groups

Multi-listed (all exchanges)

Settlement Style

Cash-settled (Trading account credited or debited in cash)

Physically-settled (Delivery of shares of the underlying stock)

Exercise Style

European Style

American Style

Tax Treatment

60/40: May benefit from 60% long term, 40% short-term capital gains

Stock options are taxed at a standard capital gains tax rate.

ETF options are taxed at a standard capital gains rate.

Typical Users

Leans institutional due to large notional size contracts Mini-contracts may appeal to retail traders

From individual investors to institutions

^*There are Weekly options that offer expirations each day of the week (M-F), as well as Friday-expiring weekly options.

Settlement Methods

Settlement determines what happens to the contract at expiration. It is the specified day that money or the underlying asset is moved into the correct account.

Physical settlement involves the exchange of the underlying asset, such as shares of stock or the ETF.
Cash settlement results in a cash payment based on the option's value.

Physical Settlement

Physical delivery is the most common settlement type for exchange-traded equity and ETF options. "Physical" in options terms means that when the option is settled, the trader is delivered the option's actual underlying asset (shares of stock).

Physical Settlement In Practice

An investor bought a 7-days-to-expirarion (7dte) SPY call option on a Friday, and that contract is in-the-money (ITM) at expiration (i.e. they have a $500 strike call option and at the option's expiration, SPY traded at $510). 100 shares of SPY will be delivered to the investor’s brokerage account, reflecting an unrealized gain of $1,000 — the cost of the SPY option. So, the investor received 100 shares of SPY in their account on Friday at settlement, reflecting a profitable trade. Then, say on the following Monday, SPY opens down $20. On Monday's open, the investor’s account will reflect an unrealized $2000 loss on the physical SPY position, which is a result of the Friday settlement of their call (100 shares x -$20), even though at Friday’s close their position was up. Conversely, if SPY were up $20 that Monday, their account would reflect an unrealized $2,000 gain. If they did not have enough cash in their account to cover the $2,000 paper loss in the scenario where SPY decreases, the investor would likely be facing a margin call due to the shortfall in their account balance. More on Margin below.

Cash Settlement

Index options are cash-settled as an index unto itself is not a tradable instrument, although shares of its constituent companies are. "100 S&P 500s" can’t be delivered to an investor because the S&P 500 Index is just a measurement tool that reflects the performance of the largest U.S. publicly traded companies. But in physically settled ETF or equity options, investors do receive the underlying stock or ETF. And as the Physical Settlement in Practice section shows, when an ETF or equity options contract settles, the investor has a new position to manage, which may or may not align with their broader investing goals.

Cash Settlement in Practice

Cash settlement allows traders to quickly reset/reenter a position after their prior position's settlement without needing to consider a new position in the stock or ETF that resulted from the physical settlement of the contract (i.e. 100 shares of SPY in their account). After cash settlement, an options trader has money in their account that can be immediately deployed instead of shares – that means more efficiency.

Options Institute Glossary

Understanding Margin

What is Margin?

Options margin refers to the funds that traders must deposit with their brokerage firm to cover potential losses on their options positions. This margin serves as collateral, ensuring that traders can fulfill their obligations in the event of adverse price movements. Options trading also involves leverage, allowing traders to control a larger position with a smaller amount of capital. While this leverage can amplify potential gains, it could also magnify potential losses. Understanding options margin enables informed decision-making and ensures compliance with regulatory and brokerage requirements, allowing traders to effectively manage their risk exposure and optimize their trading strategies.

Why Margin is Necessary?

Brokers establish margin requirements to mitigate risks and safeguard against excessive losses. Margin requirements for options trading vary depending on the type of options being traded. For call options, buying a call only requires payment of the premium upfront, with no additional margin needed. However, selling call options incurs margin requirements to cover potential losses. Similarly, buying a put option only requires payment of the premium, while selling put options triggers margin requirements. Remember that the purchase of an option cannot result in a loss greater than the premium paid upfront, whereas selling a call/put option could expose a trader to potentially significant losses, should the value of the underlying asset move substantially. Margin requirements get more complicated when multi-leg/complex orders are deployed. For instance, when selling a risk-defined vertical spread (put or call), the margin is the difference in the width of the strikes minus the premium received for the sale of the spread. For instance, if you sell a $5 wide call spread in 123 stock and receive $1.50 in premium, the margin needed for the trade is $3.50 (notwithstanding any fees incurred).

Standard margin accounts are regulated by FINRA’s Regulation-T methodology. Some brokerages may have higher margin requirements than FINRA’s mandated minimums.

Different Types of Margin

Options margin is typically divided into two categories: initial margin and maintenance margin. The initial margin refers to the amount of funds that traders must deposit when opening a position, while the maintenance margin represents the minimum account balance required to keep the position open. A margin call is when a broker requests additional money be added to trader’s margin account to meet minimum capital requirements.

Margin Requirements

Liquidity Profiles

How does it all work?

Life Cycle of a Trade

Check out Section 10 of the OI’s Options 101 course for a step-by-step explanation of how an options trade works, from trade entry to clearing and settlement.

Step by Step Explanation

Lifecycle of a Trade

Common Misconceptions and Questions

Misconceptions

Misconception: Options trading is extremely risky.

Fact: Options involve risk. So do all investments. Whether buying a stock, investing in real estate or trading options, there is always the chance that the value of the asset will decrease, and the investment will not generate the return you predicted it might. Options are not more risky than other investments, but they can be more complex, which is why fully understanding them is an important pre-requisite to trading.

Misconception: Only institutional investors should trade options.

Fact: Investors of all kinds can benefit from options trading. Options are a tool for investors to manage risk, cap losses and potentially generate income with less capital than outright ownership of the underlying asset. This can be especially beneficial to retail investors who do not have access to as much liquid capital as institutions.

Misconception: People trading 0DTE options are just looking to “get rich quick.”

Fact: 0DTE or same day expiring options trading is a tried-and-true options trading strategy that has existed for decades. While investors can use this strategy to generate income, it is typically part of a larger strategy.

Questions

What is Cboe’s role in the options market?
‍Cboe operates four U.S. options exchanges and one European options exchange. Exchanges provide a transparent and liquid market for buyers and sellers to transact.
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‍Does Cboe clear trades?
‍Cboe operates four U.S. options exchanges and one European options exchange. Exchanges provide a transparent and liquid market for buyers to match with sellers at the price point they’re willing to trade.

‍What should retail investors know before trading options?
‍It is important that new investors understand how to use the products and know their potential breakeven point, max loss and max profit are before trading. Cboe’s Options Institute provides education for all things options related. Via on-demand and live classes, articles, videos, a comprehensive glossary and sample tools, The Options Institute empowers traders with the information they need to make more informed investment decisions. Additionally, potential investors can access paper trading simulators through many retail brokerages, which allow you to test your strategies before trading.

‍How do retail investors gain access to options trading, and is Cboe involved in the process?
‍Cboe is not involved in the process of granting options accessibility to retail investors, but we work with brokerages to enhance the educational experience. Brokerage firms do their own suitability assessments when approving customers for trading listed options and granting permission levels for various options strategies. Brokerages generally have different levels of access available to prospective options traders – starting with buying calls and puts before progressing to more advanced strategies like spreads. The level of access is dependent on the client’s investment goals and past trading experience.

‍What are short-dated or 0DTE options?
‍0DTE (zero days to expiry) options, sometimes referred to as same day expiring or short-dated options, are options contracts that expire at the end of the current trading day.

‍Is 0DTE options trading new? No. This type of trading has occurred since 1973, when listed options first became available, and has grown in popularity in recent years, a testament to the evolution of markets.

‍What is the difference between notional and premium?
‍The notional value accounts for the total value of the option position (number of contracts x premium x 100), while premium is the amount actually paid or received for the option contract. Typically, the notional value of an options position is higher than the premium paid.