What Changed

NYSE Arca, a major U.S. options exchange, has updated two of its trading rules (5.32-O and 5.35-O) to allow cash settlement as an option for a specific category of customizable options contracts called FLEX ETF Options. Previously, FLEX Equity Options — options on individual stocks or ETFs (exchange-traded funds) — could only be settled by physically delivering the underlying shares when the contract expired. Now, for qualifying ETFs, traders can choose to settle in cash instead.

This rule change took effect immediately upon filing with the SEC on January 15, 2026.

What Are FLEX Options?

FLEX Options (Flexible Exchange Options) are customizable contracts that let investors set their own terms — such as expiration date, strike price, and now settlement style — unlike standard listed options. They are used primarily by institutional investors like hedge funds, pension funds, and proprietary trading firms to manage complex investment risks.

Which ETFs Qualify?

Not every ETF is eligible for cash settlement. To qualify, an ETF must meet two criteria measured over the prior six-month period:

  • Average daily notional value (shares traded × price) of at least $500 million
  • Average daily trading volume of at least 4,680,000 shares (roughly 200 shares per second)

NYSE Arca will review qualifying ETFs twice a year — on January 1 and July 1 — and announce results via Trader Update. New eligible ETFs can begin trading with cash settlement on February 1 and August 1 of each year.

The exchange will permit cash settlement on a maximum of 50 ETFs at any time. If more than 50 ETFs qualify, the top 50 by average daily volume will be selected.

As of February 2, 2026, the 50 eligible ETFs include well-known funds such as SPY (SPDR S&P 500), QQQ (Invesco QQQ Trust), IWM (iShares Russell 2000), TLT (iShares 20+ Year Treasury Bond), GLD (SPDR Gold Trust), and many sector and international ETFs. Notably, Bitcoin ETFs including IBIT, GBTC, BTC, and BITB are explicitly excluded from FLEX trading under the current rules.

Why Does This Matter?

Physical settlement — where actual ETF shares must be delivered upon exercise — can create complications. If delivery of shares is delayed or disputed, reversing the transaction is costly because the share price will have moved. Cash settlement avoids this problem entirely by exchanging money instead of shares.

Many institutional investors already trade cash-settled ETF options in the over-the-counter (OTC) market, where settlement restrictions don't apply. This rule change brings those instruments onto a regulated exchange, where they are cleared through a central clearinghouse (the Options Clearing Corporation, or OCC), providing greater transparency and counterparty protection.

Position Limits Still Apply

Cash-settled FLEX ETF Options are subject to the same position limits (caps on how many contracts one party can hold) as physically settled options on the same ETF. Importantly, positions in cash-settled and physically-settled options on the same ETF are counted together toward these limits. Position limits range from 250,000 contracts for most qualifying ETFs up to 3,600,000 contracts for SPY.

Who Is Affected?

This rule change primarily affects institutional traders and professional market participants — hedge funds, proprietary trading firms, and pension funds — who use FLEX Options to manage portfolio risk. Retail investors are unlikely to be directly affected, as FLEX Options are generally not retail products.

This change does not affect standard (non-FLEX) equity or ETF options, nor does it impact F-1 students, H-1B workers, or other immigration-related processes.

Bottom Line

NYSE Arca is expanding its FLEX Options product suite to include cash settlement for the most liquid ETFs, aligning itself with rules already in place at NYSE American, Cboe, and other exchanges. The change is effective immediately and is designed to attract institutional investors who currently use the less-regulated OTC market for similar products.