Trading Options on SPY versus SPX

Options traders sometime prefer to trade index’s like SPY and SPX due to high liquidity, small bid ask spreads and straight forward tax treatment.
When I look at these two choices I see some differences which are important to know depending on whether you trade large positions or small.

For starters let’s compare the cost of similar trades on each index.

Example Trade

Sell 1 SPX. Sell 10 SPY
1700/1710. 170/171
Call Spread. Call Spread
for $3.33 CR. for .33 CR

The first thing you will notice is that increments on SPX are ten times bigger then the SPY.
This means the cost of each position is ten times larger in the SPX and the smallest spread width is ten times greater.

So we are trading a SPX spread of 1700/1710 and the smallest difference between the strikes is ten dollars. Whereas on the SPY the smallest difference is one dollar and we trade a 170/171 spread.

Example Trade

Sell 1 SPX. Sell 10 SPY
1700/1710. 170/171
Call Spread. Call Spread
for $3.33 CR. for .33 CR

The next thing you’ll notice is that the possible loss on the ten dollar spread on the SPX is ten times $100 or $1000. Versus the trade on the SPY where the possible loss is $1 times 100 or $100 .

This means that the credit derived from the spread on the SPX is ten times larger. Do the credit on the SPX trade is $3.34 versus .33 on the SPY.

This means the total capitol at risk on the one contract SPX trade is ten times larger also.
Compare
SPY one dollar spread, .33 credit, $1.00 - 0.33 = 0.66 cents times 100 equals $66.66 cents at risk per contract for a $33.33 gain or profit.
Versus
SPX 10 dollar spread, $3.33 credit, $10.00- 3.33= $6.67 times 100 equals $667.00 total risk for a possible 3.33 times 100 equals $333.00 reward.

Now as you can see you risk ten times as much money trading SPX due to its size, but you make ten times as much premium. But you can make the same amount of money in the SPY by trading ten contracts. This allows you to make just as much money in SPY as SPX, but you get charged commissions by the contract, so one contract in SPX is $1.5 and one contract in the SPY is $1.5 , so trading ten contracts in the SPY to earn the same credit as one contract in the SPX will cost you $15.00 total or $13.5 more then trading in the SPX.

Example Trade

Sell 1 SPX. Sell 10 SPY
1700/1710. 170/171
Call Spread. Call Spread
for $3.33 CR. for .33 CRiiko

My other observations about the SPX and SPY.

The SPX markets are wider in terms of the bid-ask spread, so you may have trouble getting filled at the median between bid and ask, and have to bid closer to the ask to get filled. The SPY markets are narrow in terms of the bid ask spread and I find it easier to get filled. The liquidity in both markets is good, but for SPY there are ten exchanges competing for your order. But in SPX there is only on exchange. So liquidity is greater in the SPY. SPY pays dividends quarterly so there is increased premium in option for dividend risk. SPY also has more exercise risk, which increases around the time of the quarterly dividend. The SPY is an American style option that can be exercised at anytime, but SPX is an European style option, which can only exercised on the option expiration date. The options on the SPY also expires ‪Friday evening‬ versus SPX ‪Friday morning‬, so the SPY gives you an extra day to trade or close trades. Two IRS treats index’s like SPX differently from ETFs like SPY. Indexs are taxed as 60% long term (15% tax rate) and 40% short term ( 35% tax rate) no matter how long the position is held.

Stay thirsty for knowledge my friends.

✍️ written by Shortsegments