An option based on a stock market index (SPX, NDX, RUT). Typically cash-settled, European-style, and eligible for Section 1256 tax treatment. No share assignment — settlement in cash only.
⚡ KEY TAKEAWAY: Index options are the premium seller's best friend: cash settlement (no assignment risk), European exercise (no early assignment), and 60/40 tax treatment. SPX is the gold standard.
Based on a market index (SPX, NDX, RUT). Cash-settled: no shares delivered, just cash for the ITM amount. European-style: exercise only at expiration. Taxed under Section 1256: 60% long-term regardless of holding period.
Example
SPX iron condor: sell $5700/$5690 put spread + $5900/$5910 call spread. Credit: $3.00. If SPX stays between $5700-$5900, keep $300. Cash settlement: no shares, just $300 deposited Monday. Tax: 60/40 split.
Common Mistakes
Assuming SPX is just a bigger SPY. Different settlement (AM vs PM), different exercise style (European vs American), different tax treatment (1256 vs ordinary), different multiplier (same 100, but no physical shares). They're different products.
An option based on a stock market index (SPX, NDX, RUT). Typically cash-settled, European-style, and eligible for Section 1256 tax treatment. No share assignment — settlement in cash only.
Why does Index Option matter for premium sellers?
Index options are the premium seller's best friend: cash settlement (no assignment risk), European exercise (no early assignment), and 60/40 tax treatment. SPX is the gold standard.
How does Index Option work?
Based on a market index (SPX, NDX, RUT). Cash-settled: no shares delivered, just cash for the ITM amount. European-style: exercise only at expiration. Taxed under Section 1256: 60% long-term regardless of holding period.
What are common mistakes with Index Option?
Assuming SPX is just a bigger SPY. Different settlement (AM vs PM), different exercise style (European vs American), different tax treatment (1256 vs ordinary), different multiplier (same 100, but no physical shares). They're different products.
