CBOE: Welcome to the 21st Century

As a long-time CBOE market maker, I’ve been very disappointed in how my ‘home’ exchange has handled SPX options. Obviously they didn’t care because this is a trading vehicle with world-wide support and fantastic trading volume.

Nevertheless, change is in the air and I love it. In fact, I plan to switch from trading the more volatile RUT options to trading SPX options, once the changes described below are made.

Goodbye to AM Settled SPX Options

I recently discussed the fact that the CBOE quietly transformed their Weeklys SPX options from morning settlement to afternoon settlement.

I also expressed displeasure with the perceived unfairness of morning settlement, where the settlement price is often very different from ‘reality.’

It appears that the CBOE is coming to its senses:

CBOE Holdings, Inc. (NASDAQ: CBOE) announced plans today to list on C2, the company’s new alternative exchange, an electronically-traded version of its flagship S&P 500 Index option (SPX), which it is calling “SPXpm.” The Company submitted a rule filing to the Securities and Exchange Commission (SEC) today and plans to list SPXpm upon SEC approval.

Under the proposed rule change filed with the SEC, SPXpm will be identical in structure to CBOE’s traditional SPX index option product, except it will have “p.m.” settlement.

A press release is available with more information.

I’m pleased to see the original Options Exchange realize that the 21st century arrived more than a decade ago. Electronic trading is mandatory. Eliminating morning settlement makes this product viable to me. I avoided SPX options because of the lack of electronic markets and the unfairness (that’s a kind word for ‘stupidity’) of the method chosen as the settlement price for expiring options.

CBOE: Good luck and I wish you well with your new, improved product – when it gets approval for trading.

Another CBOE product is worthy of special notice

The CBOE has begun listing SKEW indexes. Here’s the quote from the http://www.cboe.com/micro/skew/introduction.aspx:


View The Press Release – CBOE to Begin Publishing Values for CBOE S&P 500 Skew Index

Introduction to CBOE SKEW Index (“SKEW”)

The crash of October 1987 sensitized investors to the potential for stock market crashes and forever changed their view of S&P 500® returns. Investors now realize that S&P 500 tail risk – the risk of outlier returns two or more standard deviations below the mean – is significantly greater than under a lognormal distribution.

The CBOE SKEW Index (“SKEW”) is an index derived from the price of S&P 500 tail risk. Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant.

One can estimate these probabilities from the value of SKEW. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the “skew”.

I’m glad to see this index is being published.


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4 Responses to CBOE: Welcome to the 21st Century

  1. rick f. 03/02/2011 at 7:50 AM #

    This indeed is great news, Mark. I have hated the pit-only SPX options and stayed away from them after finding it hard to get timely[1] fills on more than a few occasions. Wonder why the CBOE suddenly woke up to what many have been clamouring about for ages?

    Now we can only hope there’s enough liquidity on these electronic SPXpm contracts to make it worthwhile for us, right?

    [1] Timely on the SPX could mean “same-day” on a limit order splitting the b/a spread on a 5-lot. ;(

    • Mark D Wolfinger 03/02/2011 at 8:25 AM #


      There will be enough liquidity – especially when they stop trading the am Settled options. I must assume those will disappear, although I did not see any specific mention of that.

      One time it required 90 seconds before I received a fill – after I had seen the trade was made. And holding onto a leg for that long is treacherous. Broker would not let me do the ‘sell side’ until it had been confirmed that I was filled on the buy side. It was ‘never again’ after that experience.

  2. Antonio 03/02/2011 at 2:46 PM #

    Hi Mark

    You posted by twitter the last IC you did, but I apreciate you skewed it a lot. You allways say you dont know about T.A. Why skew now and not allways?

    Please could you explain this trade in more detail.

    Thanks a lot.

    PD Cant wait for OFR premium.


    • Mark D Wolfinger 03/02/2011 at 3:07 PM #

      There’s not much detail. With RUT near 810 I traded a May iron condor:

      730/740 P spread – about 70 points OTM
      920/930 C spread – about 110 points OTM
      credit $2.70

      My current positions allow the sale of puts that are closer to being at the money, so that’s what I did.
      This is not a trade made in a vacuum – it’s just an addition to my current portfolio. I already own small positions in other May iron condors.
      Thus, there is no good analysis I can give to you.

      However, tweeting without an explanation is not right. I’ll try to remember to avoid doing that next time.