Defined-Outcome ETFs Fuel Surge in Flex Options

Flex contracts, also known as "Flex" options, are emerging as a key tool behind the rise of defined-outcome ETFs. These contracts allow asset managers to customize strike prices and expirations, rather than relying on standardized listed contracts. This flexibility is driving demand for Flex contracts as more investors seek to tailor their investments to specific strategies and goals.

Flex options, also known as "Flex" options, are gaining traction as a critical tool in the growth of defined-outcome exchange-traded funds (ETFs). These bespoke equity derivatives allow asset managers to set custom strike prices and expiration dates, unlike standardized listed contracts. This flexibility is driving demand for Flex options as investors seek to tailor their investments to specific strategies and goals.

Introduced by Cboe Global Markets Inc. in 1993, Flex options have seen a surge in popularity in recent years. According to Cboe data, the number of outstanding contracts has more than tripled since 2022, while the average daily volume has climbed 44% over the past year [1]. This growth is largely tied to the rapid expansion of defined-outcome ETFs, which aim to deliver highly specific goals such as hedging against losses or enhancing income. Assets in these products have swelled more than 60% over the past year to $215 billion, with nearly $90 billion managed by buffer funds that can reduce downside risk by giving up some potential upside [1].

Flex options are crucial for building these products due to their ability to allow users to pick custom strike prices and expiration dates. Matt Kaufman, the head of ETFs at $44 billion asset manager Calamos, stated, "I cannot reliably or effectively use listed equity options to build a defined outcome strategy. If you went to the listed equity options marketplace, you might not be able to find the exact strike prices that you need" [1]. This customization is particularly valuable for hedging against specific events, such as a 10% drop in the S&P 500 Index, where the strike price can be left blank to execute automatically at the end of the day based on the closing price of the underlying security [1].

Beyond ETFs, Flex options are used in other trades, including synthetic stock borrow and reverse conversion trades, which account for roughly half of Flex option trading [1]. These options can be "European-style," where the contracts can only be exercised at the expiration date, eliminating the possibility of early exercise and ensuring positions remain in place until closed or expired. This feature is preferred by hedge funds to avoid early assignment and potential trade morphing [1].

Flex options are still a niche product, representing just 2% of total volume on a typical day, according to Cboe data. However, their usage is growing as more banks and clients become adept at booking these trades. RBC Capital Markets' global co-head of flow trading, Chad Blank, noted that the Flex options business of his desk has increased "in orders of magnitude" over the past couple of years as demand from ETF providers has risen [1].

In conclusion, Flex options are playing a pivotal role in the growth of defined-outcome ETFs and other specialized trading strategies. Their ability to offer customization and transparency makes them a valuable tool for asset managers and investors seeking tailored investment solutions.

References:
[1] https://www.bloomberg.com/news/articles/2025-08-17/boom-in-bespoke-etfs-drives-growth-of-niche-a-la-carte-options
[2] https://finance.yahoo.com/news/unpacking-q2-earnings-flex-nasdaq-033147536.html