Cash Settled, Broad based Index Options receive favorable tax treatment from the IRS.
60% of the gain, regardless of how long it was held, is taxed at the long term capital gain tax rate.
40% is treated as short term gain and added to your ordinary income.

Marty Kearney Seminar Summary (Courtesy Bill Ghauri on 27 Oct 2006)

CBOE Listing of Broad Based Cash-Settled Index Options

SEC Definition of "broad Based Index"

IRS Resource Publication 550(2005), Investment Income and Expenses:
http://www.irs.gov/publications/p550/ch04.html#d0e8949

IRS FORM 6781:
http://www.irs.gov/pub/irs-pdf/f6781.pdf

Article discussing IRS Section 1256 treatment:
http://options2.registeredrep.com/

CBOE "Taxes and Investing" document:
http://www.cboe.com/LearnCenter/pdf/TaxesandInvesting.pdf

Motley Fool article:
http://www.fool.com/taxes/2004/taxes041015.htm

Listing of Exchange-Traded Index Options from Twenty-First Securities Corporation:
http://www.twenty-first.com/exchange-traded_index_options.htm