The 2 Newest SPX Option Products

04/10/2012 1:30 pm EST


Marty Kearney

Senior Staff Instructor, The Options Institute, CBOE

New SPX "super LEAPs" will meet the needs of traders and investors with extra-long time horizons, says Marty Kearney, who also discusses the early success of the PM-settled SPX options.

My guest today is Marty Kearney from the Chicago Board Options Exchange (CBOE). We’re talking about SPX options and what’s new there. So Marty, I know it’s been a popular product, but what’s new?

What’s new is we just got approval for five-year SPX products, and we’re calling these “super LEAPs.” You know, the LEAPs only go out about 30 months at the longest, but we’ve had big demand by certain types of investors—insurance companies, hedge funds, and things of that nature—that want something longer than two to two-and-a-half years. So this five-year, I think, can be a very interesting product.

What types of companies, and what are they using this for? Why do they need five years out?

I think insurance companies especially. They’re used to hedging their currency risk or interest rate risk sometimes going out five, ten, or 20 years, so having something longer than a two-year option could be very beneficial to them.

Is this a product that a retail trader might use as well?

I think it could be. I think there could be some circumstances where someone has a longer-term outlook on the market and they want to go a little bit longer than a year to two-and-a-half years depending on where we are in the cycle. So I think having the flexibility could be helpful to investors.

Also, the PM-settled versions of the SPX options have launched recently. How have those been received?

They’ve been received pretty well. The buying was right where we thought it would be.

Many investors like the idea of having an option that settles in the afternoon, which stocks and ETFs have always done. SPX, of course, is an AM-settlement option, so they like the PM settlement.

It’s on an all-electronic platform, so they’re used to the point and click and they like that. They also like that the SPXpm—like SPX—is ten times the size of SPY, so they can get a lot of bang for their buck with lower commissions, which is good.

We talked about this last year at the launch, but the number of market makers has more than doubled on the product, so we have a lot of liquidity, a lot tighter markets, and I think it’s a better product.

See also: The Latest Innovation in SPX Options

Do you see traders using this as a hedging tool or an outright profit tool directly?

Both. I see people talking about how SPX or SPXpm could be wonderful tools for getting real good bang for your buck to hedge a portfolio, but there are also people making investment decisions long, short, and neutral using these products.

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