How index options can help you reach your investing goals

Whether you’re interested in generating income, hedging against market downturns, or expressing your view on potential market moves, there’s an options strategy that may meet your needs. 

Options enable you to enter trades already knowing your potential max gain, potential max loss, and the market’s expected probability of success for your trade. 

Index options specifically offer some unique benefits, including potential tax savings, cash settlement, and no early exercise or assignment risk. Read more about the benefits of index options.

If you’re new to index options, check out this primer or go to Cboe's Options Institute to get up to speed.

Generate income

If income generation is your primary goal, selling options contracts allows you to collect a premium. Ideally, options sellers want the contract to expire out of the money so they can keep the entire premium, or at least, lose enough in value so that the contract can be purchased back at a lower price than it was sold for.

The goal of options income strategies is to balance the probability of success with potential returns. Typically, trades with a higher probability of success have lower returns, and vice versa. Longer-dated options may offer higher premiums, but there’s also more time for the underlying asset to move. Options with strike prices in the money typically offer a seller more premium, but the deeper in the money they are, the less likely they are to expire worthless (the seller’s ideal outcome). Options further out of the money have a higher likelihood of expiring worthless but generally offer sellers lower premiums.

Common income generation strategies:

• Covered call writing: An investor holding a broad S&P 500^® ETF can sell SPX^® call options to collect premiums. If SPX stays below the strike price, the options expire worthless, and the investor keeps the premium as income. This is a steady income approach without needing to sell the underlying assets.

• Selling cash-secured puts: The investor sells lower strike put options on SPX at a level they are comfortable buying while maintaining enough cash (strike price x number of contracts x multiplier) to cover the potential cash-settled obligation if assigned. They collect the premium and earn interest on the cash-equivalent which would be used to purchase SPX exposure if assigned. This works well in stable or bullish markets to generate regular income.  

• Iron condor strategy: By selling an out-of-the-money put and call, while buying further out-of-the-money hedge options, an investor profits from low volatility if SPX remains within a range. The collected premiums create income with limited risk exposure.

A real-life example of the covered call strategy:

• Scenario: A retail investor holds an S&P 500 ETF or an equivalent portfolio valued at $100,000. They expect the market to remain flat or slightly bullish over the next month. 

• Action: The investor sells SPX call options with a strike around 2% above current levels (or notional level of $102,000), expiring in one month and collecting options premium (around 1% of the notional or $1,000 of option premium collected). 

• Outcome: If SPX has less than a 2% rally over the next month (stays below $102,000 notional), the option expires worthless, and the investor keeps the $1,000 premium as income. If SPX rises more than 2% (notional greater than $102,000), the investor will be assigned on the short call that will settle to cash equal to the settlement price minus the strike price. The investor still benefits from the SPX increase plus the premium collected, but profits are capped at 3% for the month (2% profit from the notional increase and 1% profit from premium collected for a 3% monthly profit). This strategy generates income while holding underlying assets and suits stable markets.

Protect your portfolio

If your portfolio generally tracks an index like the S&P 500, index options can help protect you against downside risk. They can act like portfolio insurance, offering downside protection in exchange for a premium.

Long puts are bearish strategies, gaining value when the underlying falls. For example, a trader with a retirement portfolio tracking the S&P 500 may buy SPX puts to offset potential losses in a downturn. Hedging generally represents low-probability trades because the goal is protection rather than profit. Ideally, like insurance, you hope not to use it but are glad it's there if needed.

Common hedging strategies:

• Protective puts on SPX: Suppose an investor has a $1 million equity portfolio correlated to SPX and worries about a market downturn. They could buy out-of-the-money SPX put options, paying a premium (~2% of portfolio value), to hedge downside risk over a set period. If the market declines significantly, the puts increase in value, offsetting losses.

• Broad market risk reduction: SPX options offer exposure to the entire S&P 500, allowing investors to hedge market-wide systematic risk instead of individual stock risk. The SPX options are liquid and cash-settled, making them efficient tools to protect large portfolios.

An example of a protective approach:

• Scenario: An investor has a $1 million equity portfolio correlated to SPX and worries about a market downturn over the next three months.

• Action: The investor buys out-of-the-money SPX put options with strike roughly 10% below current levels, paying about 2% of portfolio value in premium ($20,000).

• Outcome: If the market falls sharply, the puts increase in value, offsetting portfolio losses. If the market remains flat or rises, the premium is lost but viewed as insurance cost. This approach limits downside risk and suits investors focused on capital preservation.

Efficient Exposure

Options can be used to express opinions on future price movements. Whether bullish, bearish, neutral, or anticipating volatility, index options allow profiting from any outlook.  A bullish sentiment may include buying calls or selling puts to gain directional exposure while a bearish sentiment may include buying puts or selling calls for expression. Advanced traders use spreads to benefit from range-bound markets or big moves regardless of direction.

Common speculation strategies:

• Buying SPX call options for bullish exposure: A bullish retail trader can buy SPX call options to gain leveraged exposure to S&P 500 upside potential with limited capital outlay. Out-of-the-money calls have a lower probability of success but higher return potential. Traders who believe the market is underpricing a potentially notable breakout move may find the risk/reward attractive. In-the-money options are more likely to finish with value, but likely lower percent-return potential. In-the-money calls may offer attractive risk/reward potential for traders who believe the market will continue to grind higher but want to gain the exposure efficiently. 

• Selling out-of-the-money puts: If an investor believes that SPX is unlikely to decline below a certain level within a certain timeframe, they can sell cash-secured puts to earn premiums, profiting if SPX remains above the strike price.

• Buying deep out-of-the-money options: For high-risk high-reward speculation, some traders buy far out-of-the-money SPX calls or puts to capitalize on significant market moves during volatility increases or events. As noted previously, out-of-the-money options have a lower probability of success and are most suitable for traders who believe the index may have a breakout (to the upside or downside). These types of options are commonly used to gain exposure for the unexpected. 

An illustrative speculation example:

• Scenario: A trader is bullish on SPX due to a forthcoming positive economic report.

• Action: The trader purchases out-of-the-money SPX call options, paying a small premium (e.g., $500) for control over $100,000 notional exposure

• Outcome: If SPX rallies above the strike plus premium, the trader profits from their leveraged gains; if SPX stays flat or falls, losses are limited to the premium paid. This strategy allows the trader to leverage a directional view with defined risk and capital efficiency. 

Why use these strategies?

• Income strategies like covered calls provide steady additional returns, ideal for investors seeking cash flow without selling holdings.

• Hedging protects portfolios from adverse moves, reducing risk in volatile or uncertain markets.

• Options offer a capital-efficient way to gain leveraged exposure to express opinions on potential market moves. 

Life Is Better with Options^®

As the home of SPX options, Cboe^® offers retail investors access to deep liquidity, broad expirations (daily, weekly, monthly), and European-style, cash-settled index options that reduce risks like early assignment. Cboe also provides robust educational resources to help investors understand option Greeks, strategies, and risk management, empowering retail traders to craft well-informed strategies tailored to their goals.

Cboe’s Trade Optimizer tool, for example, lets traders test strategies against market data, matching approaches with outlooks to optimize probability and reward. Cboe’s transparent markets and investor education help democratize access to sophisticated index option trading formerly reserved for institutions.

Index options are highly versatile instruments: there’s an appropriate strategy that can empower any trader’s investing goals. Once you’ve identified your goals, risk tolerance, and market outlook, there’s a world of options available to you. Learn more about index options powered by Cboe.

Advertiser’s disclosures: There are important risks associated with transacting in any of the Cboe^® Company products discussed here. Before engaging in any transactions in those products, it is important for market participants to carefully review the disclosures and disclaimers contained at https://www.cboe.com/us_disclaimers.