Schwab, Cboe to offer S&P 500 binary options

Charles Schwab and Cboe plan to offer all-or-nothing S&P 500 binary options to Schwab customers in the coming months. The contracts let investors place yes-or-no wagers on whether the S&P 500 will close above or below a specified level. If the prediction is correct the contract pays a fixed cash amount; if not, it pays nothing. The instruments are structured as exchange-listed options.

Schwab and Cboe are also planning a variant using Cboe’s “plus zone” feature, which provides a partial payout when the index finishes near, but not exactly at, the target level.

Cboe began exploring a return to binary options several months ago as interest in prediction-style trading grew. Executives at both firms have discussed extending contracts to other indexes and financial benchmarks. Schwab has said it will limit listings to events with measurable financial-market outcomes and will not offer contracts tied to sports, entertainment or other non-financial events.

The offerings will operate within the rules for exchange-listed options established with Cboe. Precise launch dates have not been announced.

The rollout coincides with Schwab tightening risk controls for long-short investment strategies. The firm notified advisers of stricter margin requirements: individual accounts must keep margin debits below 110% of short credits, and the aggregate limit across all accounts using long-short strategies is set at 100%. The notice warned that if accounts do not meet the requirements, Schwab may restrict new enrollments in the strategy, execute transactions to satisfy deficiencies or take other actions to manage exposure.

Schwab wrote in an investor note: “The changes we have recently shared with our participating RIA clients are designed to ensure the program grows and meets demand sustainably. With Schwab’s scale, balance sheet, and expertise behind it, Long/Short SMA Strategies on Schwab’s platform are well positioned for the long term.” At the end of the first quarter, Schwab reported margin loan balances of nearly $127 billion. Schwab’s shares have fallen about 9% so far this year as investors monitor the company’s product expansion and risk-management efforts.