S&P SmallCap 600 Index Options

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S&P SmallCap 600 Index Options

S&P 600 index options are option contracts in which the underlying value is based on the level of the S&P 600, a US equity market index designed to measure the performance of smaller public companies based in the United States. The index is calculated based on 600 small-cap common stocks with market capitalization in the range of US$200 million to US$1 billion.

The S&P SmallCap 600 index option contract has an underlying value that is equal to the full value of the level of the S&P 600 index. The S&P SmallCap 600 index option trades under the symbol of SML and has a contract multiplier of $100.

The SML index option is an european style option and may only be exercised on the last business day before expiration.

Product Name Symbol Underlying Value Contract Multiplier Exercise Style
S&P SmallCap 600 Options SML Full Value of S&P 600 $100
(Full Contract Specs)
European

How to Trade S&P 600 Index Options

If you are bullish on the S&P 600, you can profit from a rise in its value by buying S&P SmallCap 600 (SML) call options. On the other hand, if you believe that the S&P 600 index is poised to fall, then SML put options should be purchased instead.

The following example depict a scenario where you buy a near-money SML call option in anticipation of a rise in the level of the S&P 600 index. Note that for simplicity’s sake, transaction costs have not been included in the calculations.

Example: Buy SML Call Option (A Bullish Strategy)

You observed that the current level of the S&P 600 index is 225.69. The SML is based on the full value of the underlying S&P 600 index and therefore trades at 225.69. A near-month SML call option with a nearby strike price of 230 is being priced at $15.05. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $1,505.00.

Assuming that by option expiration day, the level of the underlying S&P 600 index has risen by 15% to 259.54 and correspondingly, the SML is now trading at 259.54 since it is based on the full value of the underlying S&P 600 index. With the SML now significantly higher than the option strike price, your call option is now in the money. By exercising your call option, you will receive a cash settlement amount that is computed using the following formula:

Cash Settlement Amount = (Difference between Index Settlement Value and the Strike Price) x Contract Multiplier

So you will receive (259.54 – 230.00) x $100 = $2,954.35 from the option exercise. Deducting the initial premium of $1,505.00 you paid to buy the call option, your net profit from the long call strategy will come to $1,449.35.

Profit on Long SML 230 Call Option When S&P 600 at 259.54
Proceeds from Option Exercise = Cash Settlement Amount
= (Index Settlement Value – Option Strike Price) x Contract Size
= (259.54 – 230.00) x $100
= $2,954.35
Investment = Initial Premium Paid
= $1,505.00
Net Profit = Proceeds from Option Exercise – Investment
= $2,954.35 – $1,505.00
= $1,449.35
Return on Investment = Net Profit / Investment
= 96%

In practice, it is usually not necessary to exercise the index call option to take profit. You can close out the position by selling the SML call option in the options market. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, as the option sale is performed on expiration day, there is virtually no time value left. The amount you will receive from the SML option sale will still be equal to it’s intrinsic value.

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Limited Downside Risk

One notable advantage of the long S&P SmallCap 600 call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the SML call option.

Suppose the S&P 600 index had dropped by 15% instead, pushing the SML down to 191.84, which is way below the option strike price of 230. Now, in this scenario, it would not make any sense at all to exercise the call option as it will result in additional loss. Fortunately, you are holding an option contract, and not a futures contract, and so you are not obliged to anyway. You can just let the option expire worthless and your total loss will simply be the call option premium of $1,505.00.

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Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

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In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

S&P 600 Index

S&P Smallcap 600 ($IQY)

The information below reflects the ETF components for S&P Smallcap 600 SPDR (SLY).

Percentage of S&P 600 Stocks Above Moving Average

Summary of S&P 600 Stocks With New Highs and Lows

(593 Total Components) 5-Day 1-Month 3-Month 6-Month 52-Week Year-to-Date
Today’s New Highs (% of total) 156 (26%) 34 (6%) 6 (1%) 4 (1%) 4 (1%) 6 (1%)
Today’s New Lows (% of total) 18 (3%) 4 (1%) 4 (1%) 4 (1%) 4 (1%) 4 (1%)
Difference 138 30 2 0 0 2

S&P 600 Components

Stocks: 15 20 minute delay (Cboe BZX is real-time), ET. Volume reflects consolidated markets. Futures and Forex: 10 or 15 minute delay, CT.

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S&P SmallCap 600 Index Options

Many options traders tend to overlook the effect of commission charges on their overall profit or loss. It’s easy to neglect the lowly $15 commission fee when every profitable trade nets you $500 or more. Hey, it’s only 3% right?

Let’s find out the answer by taking a look at a simple example using bull call spreads.

Suppose you make 10 bull call spread trades, where each trade has a maximum profit of $500 and a maximum loss of $500. Let’s say you are a decent trader using a trading system with a win rate of 60%. This means that for every 10 trades you make, 6 are winners while 4 are losers. For simplicity’s sake, let’s assume that you win or lose the maximum amount for each trade. So, for the 10 trades, your overall profit is ($500 x 6) – ($500 x 4) = $3000 – $2000 = $1000.

Now, when it comes to calculating your trading cost, EVERY SINGLE ONE of your 10 trades will incur commission charges.

Let’s say you are using an options broker that charges you a minimum of $15 per leg per trade.

At $15 per leg, entering each of 2-legged bull call spread will require $30. Total commission charges for entering all 10 trades will be $300. That’s not all. Don’t forget that the profitable bull call spreads will require closing transactions in which you will need to buy/sell-to-close both the call option positions. With 6 profitable trades, that means another $180 in transaction fees. Hence, your total trading cost is $300 + $180 = $480!

That takes away a whopping 48% off your trading profit!

When you implement option strategies with even more legs such as condors and butterflies, the commission charges are even higher.

So, even if you are a skilled trader with a win rate of 70% or more, you are still better off finding a low- commission broker if you are still paying a minimum of $15 per trade. Today, there exist online options brokers that charge as little as $5 per trade while still providing excellent trade execution and user interface. Using the above example, you could have increased your profit from $520 to $840 – or 62%! – simply by switching to a low cost options broker.

Of the many low-cost options brokers out there, we recommend OptionsHouse as they offer the most excellent combination of cost and usability.

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Best Binary Options Brokers 2020:
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    Top Binary Options Broker 2020!
    Best For Beginners!
    Free Trading Education!
    Free Demo Account!
    Get Your Sign-Up Bonus Now:

  • BINOMO
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    Only For Experienced Traders.

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