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Cash-settled options on the S&P 500 index existed before options on futures on that index. Where would the demand for options on futures have come from prompting the exchange to begin listing them, given the two types of contract appear superficially equivalent in terms of their risk profile and price? If one wants exposure to the index via options, what are the arguments for trading the option on the index future over the option on the index?

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  • $\begingroup$ You have left out a third choice: options on SPY or other ETFs that track the index. A comparison of the three alternatives is complex because, as you said, there are a variety of small technical differences between them. For example if you want the smallest margin requirement you are better off with options on futures, etc. I am not sure I fully understand the question: are you asking why one of these markets does not win out and kill the others? Or are you asking ofr a full list of all the minor advantages/disadvantages (many of which you seem to already know)? $\endgroup$ – Alex C Feb 1 '17 at 0:33
  • $\begingroup$ Alex, there are countless ways of expressing a bullish view. I mentioned two only for the purpose of my question. And yes, market ostensibly means market segment; CTAs, corporates, banks, and the like. $\endgroup$ – ScarletPumpernickel Feb 1 '17 at 6:09
  • $\begingroup$ Also, why would it the case that options on futures attract a smaller margin requirement than options on the index? $\endgroup$ – ScarletPumpernickel Feb 1 '17 at 6:25
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    $\begingroup$ Have rephrased the question to hopefully make it clearer. $\endgroup$ – ScarletPumpernickel Feb 1 '17 at 6:39
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Margin requirements for futures work differently than on security products, both for historical reasons and because they are supervised by a different agency (CFTC cs. SEC). This allowed an opening for the Chicago Mercantile Exchange to get into the business of S&P 500 options that had been pioneered by the CBOE, in spite of CBOE objections. As a CME brochure says the options on futures allow "capital efficient" exposure to the index, i.e. essentially lower and more convenient margin requirements, especially when you combine a futures exposure with option exposure(s) (due to "portfolio margining" rules). One drawback is that they require a futures trading account, which some small or unsophisticated institutions may not have.

There is a strong rivalry between the CBOE and the CME, each has satisfied users, and each has friends among senators in Washington D.C. and the respective regulators which means that the situation is unlikely to change and both exchanges will go on to offer users their solution to achieve S&P 500 options exposure. (Of course there are also people who participate in both markets and help keep the prices inline). That customers have a choice is a (fortunate) side effect of U.S. financial regulatory complexity, with futures and securities regulated differently.

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