The Boom in Bespoke ETFs is Causing Niche 'A-La-Carte' Options to Grow

When Matt Kaufman, head of ETFs at Calamos Investments, needs to incorporate options into defined-outcome ETFs, he skips the standard route. Instead, he turns to a unique type of equity derivative that allows him not an exchange to set the terms: Flexible Exchange Options, or “Flex” options.

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While these instruments have existed since Cboe Global Markets launched them back in 1993, their popularity has skyrocketed only in recent years. The data tells the story: outstanding Flex contracts have more than tripled since 2022, and average daily volumes are up 44% year-over-year, according to Cboe.

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What’s fueling this surge? The booming demand for defined-outcome ETFs, which are designed to deliver very specific performance targets—whether it’s downside protection or income enhancement through options strategies.

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Assets in these products have ballooned by more than 60% over the past year to $215 billion, Asym 500 reports. Of that, nearly $90 billion sits in buffer funds, which help limit losses by sacrificing some upside.

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Flex contracts have become the cornerstone of building these specialized ETFs because of their customization power users can set precise strike prices and expiration dates. Kaufman explains it this way:

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“You can’t reliably use standard listed equity options for this purpose. The strike prices you need often just aren’t there in the regular market.”

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This level of customization is usually reserved for over-the-counter derivatives, but Flex options offer that flexibility while remaining exchange-listed and centrally cleared by the Options Clearing Corp. That brings crucial benefits like transparency and reduced counterparty risk, which matter greatly for ETFs governed by the strict requirements of the Investment Company Act of 1940.

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“Flex options give you an exchange-traded product,” Kaufman says. “That means liquidity, the ability to move in and out when you want, and knowing exactly what outcome you’re buying.”

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One standout feature of Flex options is the ability to leave the strike price open until the end of the trading day, where it’s set based on the closing price of the underlying asset. This is particularly attractive for strategies like hedging against a 10% market drop without worrying about intraday fluctuations.

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According to Chad Blank, global co-head of flow trading at RBC Capital Markets, dealers can offer better pricing on these contracts because they don’t have to dynamically hedge throughout the day.

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While ETFs have been a major driver of Flex growth, the use cases extend far beyond that. Roughly half of Flex activity involves synthetic stock borrow and reverse conversion trades, says Henry Schwartz, VP of derivatives market intelligence at Cboe.

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Here’s why that matters: traditional U.S.-listed options are American-style, meaning they can be exercised anytime, which complicates certain strategies. Flex options, however, can be structured as European-style, exercisable only at expiration. For hedge funds, that eliminates early exercise risk critical when hedging through deal timelines.

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Short sellers also lean on Flex options to build synthetic short positions without borrowing stock by buying a put and selling a call at the same strike. This approach sidesteps costly or hard-to-find stock loans, embedding the borrow cost into the option premium.

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Flex options are also popular in risk arbitrage and event-driven strategies. Reverse conversion packages long stock, long put, short call are often used to maintain positions during tender offers or corporate actions. Recent examples include AMC’s preferred-to-common share conversion and Johnson & Johnson’s $40 billion Kenvue split-off.

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“The desks that use it love it, and more are discovering how efficient it is,” Schwartz notes.

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Another key advantage? Custom expirations. Traders can align hedges with earnings announcements or deal deadlines, just like major index and ETF options with daily expiries.

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For all the excitement, Flex options remain a small slice of the pie about 2% of total listed equity derivative volume, Cboe data shows. They’re not ideal for casual traders due to higher brokerage and execution costs. Some hedge funds still prefer OTC trades for secrecy, and intermediaries worry about losing bilateral business. But adoption is accelerating.

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“Booking Flex trades is getting easier,” says Alex Kosoglyadov, managing director of equity derivatives at Nomura. RBC’s Blank agrees: demand from ETF issuers has driven growth “by orders of magnitude” in recent years.

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“The growth has been explosive,” Blank adds.

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Flex options give investors precision, transparency, and liquidity a rare combination in the derivatives world. As demand for outcome-based strategies and efficient hedging rises, expect Flex options to keep moving from niche to mainstream.

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