In this article:
Overview
Index options let you trade options on a market index, like a major stock market index, instead of an individual stock. Unlike equity options, no shares change hands. Instead, the difference between the strike price and the index value at settlement is paid out in cash.
You'll find index options by searching for the index you want to trade and choosing an expiry date, the same way you'd search for any other options chain.
Eligibility
- You can trade index options in any account that supports options trading.
- In a non-margin account, you can trade long options and cash-secured puts.
- In a margin account, you can trade any strategy allowed (except for covered calls) by your options level. Level 3 and Level 4 strategies require a margin account.
- There's no separate approval level for index options; your existing options level applies.
How index options work
| Dimension | Equity or ETF options | Index options |
|---|---|---|
| Underlying | A tradable stock or ETF | A market index value, not a tradable security |
| Settlement | Physical shares are delivered | Cash-settled against the index value at expiry |
| Exercise style | American, any day until expiry | European, only at expiration |
| Early assignment | Possible, can be assigned early | Not possible, European-style removes it |
| Contract size | Standard | Typically larger than a comparable ETF option contract |
| Dividends | ETFs can pay dividends, which can drive early exercise | None, it's an index |
| Trading fee | Commission-free | $1 USD per contract, per leg |
Strategies you can trade
Index options work the same way as equity options for strategy purposes, based on your options level:
- Long options and secured puts
- Multi-leg strategies like spreads
How to trade index options
- Log in to your Wealthsimple profile
- Select the Search (magnifying glass) icon at the top-left of the screen
- In the search bar at the top, type in the index option you want to trade
- Select Trade options
- Set up your desired options strategy
- Choose your desired account and select Next
- Review your order details
- Select Submit order
Fees
Most trading on Wealthsimple is commission-free. Index options are an exception, because of fees charged by the exchange that list these products.
- A trading fee applies per contract. It varies by symbol and ranges from $0.25–$1 USD per contract.
- The fee is charged per leg, so multi-leg orders pay it on each leg.
- The fee applies on both the buy and the sell.
- There's no fee when an option is exercised or assigned.
- The fee is the same across all volume tiers and is shown before you place your order.
Frequently asked questions
What are index options?
Index options let you trade options on a market index, rather than on individual stocks. When the contract settles, you don't receive or deliver shares; it settles in cash based on where the index is at settlement. This means there's no risk of being assigned shares you didn't want.
What strategies can I trade with index options?
You can trade long options and secured puts, as well as multi-leg strategies like spreads, based on your options level. Covered calls aren't available, since there's no underlying index to hold.
Why is there a fee to trade index options when other trades are free?
Index options carry a trading fee that ranges from $0.25–$1 USD per contract, depending on the symbol. This fee covers the exchange fee, regulatory fees, and Wealthsimple's portion. It's charged per contract on each leg of your order, applies on both the buy and the sell, and is shown before you place your order. There's no fee when your option is exercised, assigned, or settles at expiry.
How is an index option different from an ETF option?
ETF options are equity options; they're based on shares of the ETF, and if exercised, you'd receive or deliver those shares. Index options are based directly on the index value. They're cash-settled, European-style so they can't be assigned early, and typically larger in size than a comparable ETF option contract. Index options also carry a $1 USD per-contract fee that ETF options don't.
What does cash-settled mean?
When an index option expires in-the-money, you don't receive or deliver shares. Instead, the difference between the strike price and the index settlement value is paid out in cash directly to your account. Settlement is automatic, so there's nothing you need to do.
Can I exercise an index option early?
Index options are European-style, so they can only be exercised at expiration, not before. This is different from equity options, which can be exercised any time before expiry. If you want to exit a position before expiry, you can close it by selling the contract in the market.
What accounts can I use to trade index options?
Any account that supports options trading can trade index options. In a non-margin account, you can trade long options and secured puts. In a margin account, you can trade any strategy allowed by your options level. Your existing options approval level applies; no additional approval is needed.
Are there different tax rules for index options?
In the US, some broad-based index options can get special tax treatment. This doesn't apply to Canadian residents; CRA rules apply instead. We recommend speaking with a tax professional for advice specific to your situation.
What happens to my index options position at expiry?
If your position expires in-the-money, it's automatically cash-settled and the value is credited or debited to your account. If it expires out-of-the-money, it expires worthless. No action is required.
Can I trade index options during extended or overnight hours?
No. Index options can only be traded during regular trading hours (9:30 am–4:15 pm ET).
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