Options on Mini-SPX (XSP) Index Access the Advantages of SPX Options at 1/10 the Contract Size

U.S. Options

XSP Options

Options on the Mini-SPX (XSPSM) Index offer investors flexible tools to manage large-cap U.S. equity exposure, mitigate portfolio risk, and generate additional options premium income.

Key features of the index options include:

P.M.-Settlement in Cash on Mondays, Wednesdays, and Fridays Avg. Daily Volume for Mini-SPX (XSP) Options XSP contracts settle in cash, so there is never a possibility of making >> Traded on Cboe Options Exchange and on the EDGX Options Exchange. or taking delivery of unwanted shares and disrupting your portfolio. Monday, Wednesday and Friday P.M. settlements are available (SPY ETF options have physical settlement into shares.) XSP options 68,840 are PM-settled at expiration, allowing traders to manage their positions throughout a settlement day’s trading.

Point-and-Click Access with Price and Quote Transparency SEC-regulated hybrid trading on competitive open outcry and 19,423 >> 11,448 14,313 electronic markets on Cboe Options Exchange and EDGX® Options 7,639 Exchange, with guarantees by the Options Clearing Corporation (OCC). 2015 2016 2017 2018 2019 A.D.V. on Cboe Options Exchange. www.cboe.com/XSP European-Style Exercise >>Like SPXSM and other Index options, XSP options can only be exercised at expiration, so there is no risk of early assignment.

Margin for Covered Calls – Index Options with ETF Underlying Open Interest for Mini-SPX (XSP) Options In 2019 open interest grew to more than 3 million for XSP options >> Cboe Regulatory Circular RG15-183 notes that certain short positions in cash-settled index options may receive covered margin 3,023 treatment.

Potentially Favorable Tax Treatment* 530 641 679 >>Under section 1256 of the Tax Code, profit and loss on transactions 292 399 in certain exchange-traded options, including SPX and XSP, are entitled to be taxed at a rate equal to 60% long- term and 40% 2014 2015 2016 2017 2018 2019 short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the Tax Code. Maximum open interest per year (in thousands). Source: Cboe Options Exchange. www.cboe.com/XSP Growth in Volume and Open Interest >>For XSP options from 2018 to 2019 – average daily volume grew 254% (to more than 68,000) and maximum open interest grew 345% (to more than 3 million).

Smaller Contract Size and FLEX® Options >> At 1/10th the size of S&P 500® (SPX) options, XSP options provide more flexibility to fit a variety of portfolios and strategies. Investors can customize key contract terms, such as exercise prices, exercise styles, and expiration dates, with XSP FLEX options.

* Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations.

Page 2 U.S. Options

Pricing XSP Options

Bid & Ask Quotes and Volatility Disseminated Bid and Ask Quotes Disseminated bid and ask quotes, and delta estimates during the afternoon of Nov. 22, 2019, (when XSP Index was at 310.96 and VIX Index at 12.58) for select The bid-ask spread for at-the-money call options was 3 cents XSP options expiring on Dec. 20, 2019. wide for an option with an underlying notional value of around $31,000. XSP Calls Expiring on Nov. 13, 2019 XSP Puts Expiring on Nov. 13, 2019 Bid Price Ask Price Strike Bid Price Ask Price Delta Delta Quote Quote Price Quote Quote

30.85 31.23 0.97 280 0.24 0.26 0.03

16.54 16.84 0.88 295 0.84 0.87 0.12

3.53 3.56 0.50 311 3.67 3.70 0.50

0.08 0.10 0.03 325 14.01 14.39 0.96

0.0 N/A 0.02 340 28.88 29.28 1.00 Five strike prices are shown above; more than 50 strike prices for the 28-day options were available. Source: pro.livevol.com

Term Structure Term Structure for XSP Options at the Close on Oct. 15, 2019 In the Term Structure chart, the difference in implied volatility for the options with 90% and 100% moneyness was greatest for options with near-term expirations – the difference was 28.8 volatility points for the one-week options. The implied volatility for OTM puts can explode as the expiration date draws closer. Implied Volatility Estimate Implied Volatility

Time to XSP Options Expiration in the Future. Interpolated estimates of implied volatility (XSP options have more than 25 expirations on Mondays, Wednesdays or Fridays). Visit livevol.com for more analysis.

Volatility Skew on Two Dates Volatility Skew for XSP Options at the close on two dates in 2019 The closing values for the VIX Index were 24.59 on August 5 Implied volatility estimates in this chart ranged from 9.2 for OTM calls to and 13.54 on October 15, and the Volatility Skew chart shows 36.4 for OTM puts (which can be used for hedging of U.S. equity portfolios) higher implied volatility estimates for the earlier date. There often is strong customer demand for OTM index puts (with lower moneyness) to protect against a “black swan” market event. 30-Day Implied Volatility Estimates 30-Day Implied Volatility

Option Moneyness (At-the-money is 100%) Interpolated estimates of 30-trading-day implied volatility. www.cboe.com/XSP

Cboe.com/XSP Sources for charts on this page include Cboe Exchange, Inc., LivoVol.com, and Bloomberg. © 2020 Cboe Exchange, Inc. All Rights Reserved. USO_v1.7 Options on Mini-SPX (XSP) Index Access the Advantages of SPX Options at 1/10 the Contract Size

Page 3 U.S. Options

Index Options Strategies

Strategies Cboe’s Mini-SPX (XSP) options are designed to provide investors ways to efficiently gain exposure to the global equity markets and execute risk management, hedging, asset allocation, and income generation strategies. www.cboe.com/strategies. Some of the many index options strategies include:

“Low-cost” Income Hedge Hedging Combination Generation Downside Collars and Iron Condors and Buy-Writes and Protective Puts Put-Spread Iron Butterflies Cash-Secured Collars Put-Writes

Implied Volatility Risk Premium (IVRP) The implied volatility of XSP options (at 95% moneyness) has exceeded the subsequent realized volatility for the XSP Index every year since 2009. The IVRP has facilitated strong risk-adjusted returns by certain options-selling benchmark indexes over more than 33 years (see, e.g., the sections on benchmark indexes below).

Implied Volatility Risk Premium for Mini-SPX (XSP) Index

30-Day Implied Volatility at 95% Moneyness 36.

32. 30-Day Implied Volatility at 100% Moneyness 4 31. 29. 28. 8

2 30-Day Subsequent Realized Volatility 8 25. 24. 23. 1 21. 20.8 0 20.1 3 19.3 19.3 8 18.6 18.5 18.4 5 16.8 16.6 16.4 16.3 15.4 15.3 14.5 14.4 13.6 13.6 13.3 12.8 12.3 12.2 11.8 11.4 11.3 11.2 8. 7. 5 2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 thru Average per year of the end-of-day values. www.cboe.com/XSP Sept

Benchmark Indexes and Performance

Dozens of Benchmark Indexes For investors who would like to compare how hypothetical options-based strategies have performed, Cboe offers dozens of benchmark indexes that sell and/or buy S&P 500 (SPX) options, including indexes that use one-week or one-month options, Cboe S&P 500 30-Delta BuyWrite Index (BXMDSM), Cboe S&P 500 BuyWrite Index (BXMSM), Cboe S&P 500 Buffer Protect Index Balanced Series, Cboe S&P 500 Dividend Aristocrats Target Income Index, and several other indexes. Some portfolio managers use both SPX and XSP options to implement strategies related to these benchmark indexes (but there is no guarantee that strategies using SPX or XSP options will perfectly match the performance of the benchmark Indexes).

Performance Since Mid-1986 Cboe’s BXMD Index sells OTM SPX options and had higher returns than other benchmark indexes in this chart. Benchmark Indexes Since Mid-1986 (June 30, 1986 - Oct. 31, 2019) 6 ax)

-t $30 198 re ,

(p $28.15 - BXMD - Cboe S&P 500 30

e $25

urn 30-Delta BuyWrite Index un et J r $20 al on

1 $25.68 - S&P 500 Index $15 or tot to $ f d es le $10 lu ca va -s $7.68 - MSCI EAFE® Index (USD) d re $5 s en xe de nth- $- in

Mo Jun-86 Jun-92 Jun-98 Jun-04 Jun-10 Jun-16

Past performance is not predictive of future returns. Actual returns for investors may differ from those of indexes. www.cboe.com/benchmarks

Page 4 U.S. Options

Benchmark Indexes and Performance

Lower Volatility and Standard Deviations Rolling 3-Year Standard Deviations Less Severe Drawdowns Cboe offers more than 10 Cboe BXMD Index buywrite indexes (including S&P 500 Index Cboe BXMD Index (BuyWrite) (BuyWrite) 12.81% the BXMD Index) that 25% collect options premiums, S&P 500 Index 14.92% 20% and that often have had 15% lower volatility than key MSCI EAFE Index (US$) 16.91% 10% stock and commodity 5% 0% indexes. S&P GSCI 20.17% Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-17

(June 30, 1986 - Oct. 31, 2019) (Dec. 1989 - Oct. 2019) Total return (pre-tax) indexes. Total return indexes. www.cboe.com/benchmarks

Higher Absolute and Annualized Returns Rolling 3-Year Annualized Returns Risk-Adjusted Returns The BXMD Index also had Cboe BXMD Index S&P 500 Index Cboe BXMD Index (BuyWrite) higher returns than key 10.5% (BuyWrite) 40% stock and commodity 30% indexes since mid-1986. S&P 500 Index 10.2% 20% The S&P 500 Index often 10% has outperformed buywrite MSCI EAFE Index (US$) 6.3% 0% indexes during bull markets, -10% -20% but the S&P 500 often had S&P GSCI 3.5% Dec-89 Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-17 more severe drawdowns during bear markets. (June 30, 1986 - Oct. 31, 2019) (Dec. 1989 - Oct. 2019) Total return (pre-tax) indexes. Total return indexes. www.cboe.com/benchmarks

Monthly Options Income

BXM Index - Monthly Gross Premiums Gross amount* received as a % of the underlying. Average was about 1.7% per month

(June 1988 - Oct. 2019). Source: Cboe Options Exchange. * Please note that these are gross amounts for premiums, and the index net return usually will be less with a buywrite strategy. www.cboe.com/benchmarks

Please visit Cboe.com/XSP for more details. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker or from The Options Clearing Corporation, 125 S. Franklin Street, Suite 1200, Chicago, IL 60606. The information in this paper is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the website information. No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice. Past performance is not predictive of future returns. Benchmark indexes such as the BXMD and PUT are designed to represent hypothetical options-oriented strategies, but like many passive benchmarks, the benchmark indexes do not take into account significant factors such as transaction costs and taxes, and there can be differences between the benchmark index performance and actual investment performance. Trading FLEX options may not be suitable for all options-qualified investors; the strategies discussed in this report should only be considered by investors with extensive prior options trading experience. Cboe®, FLEX® and VIX® are registered trademarks of, and XSP, BXM, BXMD, PUT and many other indexes are servicemarks of Cboe Options Exchange (Cboe). S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services, LLC, and are licensed for use by Cboe. ©2020 Cboe Exchange, Inc. All rights reserved. Sources for charts on this page: Zephyr StyleAdvisor and Cboe Exchange Inc.