SIE (Training Consultants v3.5, 2025): Ch. 3 Equity Options, Sec. 11 – Alternative Options

Index Options

Options that mirror a specific index (e.g., S&P 500); settle in cash, no securities exchanged.

Index Option Exercise

Buyer receives cash = market price at close – exercise price; seller owes same amount.

Automatic Exercise

Index options in-the-money by $0.01 or more are automatically exercised at expiration unless alternate instructions are given.

VIX Options

Options based on CBOE Volatility Index, usually inverse to the market.

VIX Call

Buy if expecting high volatility & market decline.

VIX Put

Buy if expecting low volatility & market rise.

Foreign Currency Options

Options based on exchange rates between two currencies.

Foreign Currency Call

Buy to hedge against declining US currency.

Foreign Currency Put

Buy to hedge against rising US currency.

OTC Options

Options traded off-exchange; not standardized, direct link between buyer & seller, usually no secondary market.

What are index options?

Options that track a market index and settle in cash.

How is an index option exercised?

Buyer receives cash equal to (market price – exercise price); seller pays same.

When are index options automatically exercised?

If in-the-money by $0.01 or more at expiration.

What are VIX options?

Options based on market volatility, usually moving inversely to the market.

When would an investor buy a VIX call?

If expecting high volatility and falling stock prices.

When would an investor buy a VIX put?

If expecting low volatility and rising stock prices.

What are foreign currency options used for?

Hedging exchange rate risk between two currencies.

When would an investor buy a foreign currency call?

To hedge against a declining US dollar.

When would an investor buy a foreign currency put?

To hedge against a rising US dollar.

What are OTC options?

Options traded off-exchange, non-standardized, direct buyer-seller link, limited liquidity.