Derivatives and securities exchange network Cboe Global Markets has introduced enhanced margin treatment for cash-settled index options with a new margin relief rule aimed at providing greater capital efficiencies for traders.

According to a press statement, the new rule reflects Cboe's ongoing commitment to "advocating for smart and responsive market structure enhancements that meet the evolving needs of its customers".

Cboe’s margin relief rule offers enhanced margin treatment when writing, or selling, a cash-settled index option in a margin account against an exchange-traded fund (ETF) that is based on the same underlying index. In the same way an investor can write an equity call option while holding a long position in the underlying security, Cboe’s rule change allows for writing of index options in a similar manner.

An investor, for instance, could write a call option on the Mini S&P 500 Index option (XSP) while having a long position in a corresponding ETF such as the iShares Core S&P 500 ETF (IVV), SPDR S&P 500 ETF Trust (SPY), or Vanguard S&P 500 ETF (VOO) to potentially enhance returns on their ETF.

Under the prior framework, there was no margin requirement for a short call that qualified as "covered.” Given the similar risk/return profiles of writing an index call option (such as XSP) against a long ETF position (such as IVV, SPY, VOO) vs writing a covered call, Cboe’s rule now treats these index options as protected for margin purposes – and not subject to uncovered option margin requirements.

This rule change is expected to enable traders to adopt overwriting options strategies at a potentially lower cost than is possible under the existing margin requirement, ultimately creating a more capital-efficient and flexible trading experience.

Cboe’s rule applies to any index call or put option written against a position in a non-leveraged index mutual fund or non-leveraged ETF that is based on the same index underlying the index option and held in the same margin account. FINRA recently adopted a similar margin relief rule which conforms to Cboe’s rule.