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 NameSymbolUnderlying ValueContract MultiplierExercise Style
S&P SmallCap 600 OptionsSMLFull 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.

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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