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Investment solutions that were once tailored for institutional investors have now become accessible to the retail market. As individual retail traders become more knowledgeable, their investment strategies are becoming more sophisticated, as evidenced by the rising use of derivatives instruments, including options. The Options Clearing Corporation recently reported that total options volume in August 2025 was 1.25 billion, an 18% increase from the prior year. Furthermore, the 2025 total options year-to-date Average Daily Volume (ADV) was 57.4 million, approximately 21.4% higher than last year’s at the same point in time.

Index options are one of the most versatile options products for investors and traders as they are turnkey solutions that allow individuals to express their market view – bullish, bearish or neutral. Cboe, the creator of listed options trading, offers standard S&P 500 Index Options (SPX) and Mini-SPX Index Options (XSP) at 1/10 the size. Below, we examine their distinct value propositions and how they can be utilized to achieve investment goals. Additionally, we’ll contrast XSP and SPDR S&P 500 ETF Options (SPY), outlining the experiential differences between the two instruments.

Index Options: A Versatile Investment Offering

Index options offer broad coverage and diversified market exposure. If a trader anticipates the market will have an upswing, they can use call index options to capitalize on the movement. Conversely, to protect against a broad market decline, put index options can help mitigate portfolio losses. Income generation is another practical use of index options, as investors and traders can sell covered calls or cash-secured puts to collect premiums.

Index options are cash-settled, which means that the buyer of an option contract receives the cash difference between the strike price and the current market price of the underlying security. Practically speaking, given that the underlying asset is an index, physical settlement is not feasible; hence, the buyer receives an amount of cash equal to the underlying asset’s value when the option is exercised. Finally, the financial efficiency and inherent leverage within index options allow investors and traders to control large positions with relatively small capital outlays.

Distinct Value Propositions: SPX And XSP

Though both offerings provide market exposure to the S&P 500 Index, they cater to different audiences. SPX is Cboe’s leading index option which offers extensive exposure to the S&P 500 Index and is ideal for speculating on market movements or hedging portfolio risk. Conversely, the smaller contract size of XSP makes it more affordable and accessible while retaining many of the benefits of the full-size contract.

Different In Size, But Capable Of Similar Impact

While the contract sizing is a key difference between SPX and XSP, traders can use the latter to achieve significant outcomes. For example, a trader anticipating short-term fluctuations following an economic report might purchase near-term SPX calls or puts to make a significant directional bet. Alternatively, they could use XSP options to implement the same investment hypothesis. However, given that XSP is one-tenth the scale, the capital outlay required would be less.

In a scenario where a trader has a neutral to bullish outlook on the market, they might sell SPX covered calls to earn premiums, while maintaining a portfolio that replicates the S&P 500 Index. If the investor wants less exposure or desires to sell multiple strike prices for greater flexibility, they can opt to write XSP calls instead. Since each XSP represents one-tenth the notional value of SPX, it offers more precise control over the quantity and variety of strikes sold. Both methods aim to produce income, but XSP allows risk to be adjusted according to the size of the account.

Contrasting Cboe’s Index Options And SPY

The expansion of exchange-traded funds (ETFs) has made them a turnkey avenue for investors and traders to gain market exposure. The SPDR S&P 500 ETF Trust (NYSE:SPY) is the world’s largest and most actively traded ETF, designed to track the performance of the S&P 500 Index. In turn, SPDR S&P 500 ETF options are standardized options contracts based on SPY, allowing investors to trade or hedge exposure to the S&P 500 Index through the ETF.

While index options and ETF options are similar in purpose – providing market participants with broad market exposure and the ability to hedge or speculate on market movements – there are inherent experiential differences between the two. The settlement approach that occurs for each solution is a primary example, as SPY delivers the underlying shares, whereas XSP is cash-settled. Another material way they differ is exercise style: index options use a European exercise style, which minimizes potential disruption to the portfolio’s structure at expiration. Whereas ETF options utilize an American exercise style, which allows for early exercise, which can be disruptive.

The tax treatment of both solutions is a seminal but underappreciated difference. Since SPX and XSP areSection 1256 contracts, traders can take advantage of a 60/40 split between long- and short-term capital gains, which reduces their overall tax rates. In contrast, SPY options are equity options and do not qualify for this tax treatment, so gains from them are taxed as short-term if the positions are closed within a year. Finally, SPX Index options trade during Global Trading Hours while SPY trades only during U.S. regular trading hours.

Taking Action With Cboe Index Options

Index options offer investors and traders greater flexibility to obtain market exposure, manage risk and enhance potential returns. Cboe’s index options grant access to diverse markets, feature cash settlement and are designed for particular clients, enabling a progressive product experience over time. When combined with proper education and practical experience, index options can serve as an important part of an investor’s or trader’s portfolio management approach.

Learn more about them on Cboe’s website here.

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