SPX Options Vs. Spy Options – Strategic Advantages and Differences

SPX has one major strategic advantage over SPY…. 

SPX is a European Style Option vs SPY being an American Style Option. This means that SPX is cash settled at the expiration date, so it cannot be exercised prior to expiration as SPY can. An early exercise can blow your trading plan for any position!  

If it wasn’t for this huge early expiration exercise risk with SPY, I would prefer SPY over SPX. This is because SPY, too, has a big strategic advantage over SPX in that SPY offers $1 wide strikes and also has a smaller contract value.  

The main advantages this pricing allows are: 

  • The ability to trade a smaller trading account 
  • Trade with more flexibility in position sizing 
  • Easier scaling in and out of trades 

Over the years, I’ve noticed that many of my trading club members have questions about trading SPX options vs SPY options, and exactly how to benefit from their strategic advantages. I share and answer many of those questions below.  

By understanding many of the similarities and differences between SPX and SPY options, you can see what works best for your trading style. Since SPX and SPY are such popular trading vehicles, it’s worthwhile to be familiar with the basics of each.   

SPY Vs SPX Overview 

Both SPY and SPX options are used primarily for those looking to invest in the S&P 500. The S&P 500 index contract tracks the 500 of the largest publicly traded company in the United States. In most cases, traders with more capital lean towards using SPX options, while those with less tend to use SPY. This is because SPX costs 10 times more than SPY, as you’ll read more about below.   

Differences Between SPX and SPY 

Also known as the Standard & Poor’s 500 Index, SPX bases its index off the 500 largest companies with shares listed on the NYSE or NASDAQ.  

SPX is considered a capitalization-weighted index and functions as theoretical. SPX options have their settlement on Friday morning. Future contracts and options usually trade, but SPX may not always trade. SPX is also known for having a wider market and wider strikes than SPY.  

On the other hand, SPY is an exchange-traded fund that bears the nickname “Spiders.” SPY tracks the performance of the S&P 500. Most of the time, you will find that the transaction price when using SPY will almost replicate SPX’s. Just like most other securities, SPY’s price is dictated through auction. Trading options for SPY stop trading on expiration Friday at the end of close of business.  

When trading larger options, SPY can produce more commissions. This is because of the potential for a larger number of contracts. SPY is known to have a lower price and buying power reduction. SPY options are always settled in shares.  

Does SPY Pay a Dividend? 

SPY pays a dividend that corresponds with the expiration day. This is a major difference between SPY options and SPX options.  

An ex-dividend is the date when the buyer of a stock can receive the last declared dividend. This usually takes place on the third Friday of March, June, September, and December. Ex-dividend day also corresponds with expiration day.  

If you own in-the-money calls, then it is important this dividend not be lost. Often, traders with in-the-money options will use the options to collect the dividend. This means that often In-the-money calls are exercised on expiration Friday.  

Does SPX Pay a Dividend? 

Unlike SPY, SPX options don’t ever have to pay a dividend. This decreases the risk of triggering options assignments.  

Are SPX Options Cash Settled? 

No shares ever change hands, so SPX options are cash settled. The difference between the settlement price and the strike price are automatically subtracted or added to the account balance at expiry.  

Since SPX options are cash settled, shares can’t be assigned before expiry. Because of this, SPX is often considered a cleaner way to trade. You won’t have to worry about an early assignment, because SPX options are only assigned at expiration, which is beneficial to the options seller.  

Cash-settling also eliminates the risk of expiring in the money and triggering a buy or sell of the security. You also don’t have to worry about pin risk, which is when the market price of the underlier of an option contract at the time of the contract’s expiration is close to the option’s strike price. 

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Settlement Price of SPX Options 

Also known as the closing price, the settlement price is determined by the opening prices of the 500 stocks in the index. It is determined on the third Friday of the month. 

The process for SPX options settling involves the in-the-money option value transferring to the option owner from the option seller’s account.  

SPX Contracts 

SPX contracts are known for being much larger than SPY contracts. They are about 10x larger, in fact. Some find an advantage in buying these larger contracts since it gives you the ability to average your price over several different price points. 

Buying larger contracts may be a better option if you are an experienced trader. The price of SPX contracts is usually a lot more than SPY contracts, which can mean higher commission costs or less commission costs depending on how your commissions are charged.  

Differences in Tax Treatment 

Many find that SPX options offer a tax advantage because of the way the IRS treats SPY options and SPX options differently from one another. During a long-term tax rate, investors are usually allowed 60% of the profits from trade when using SPX options. These are usually treated as long-term, no matter how long you held them.  

SPX options receive these advantages because the IRS gives SPX options special Section 1256 treatment. 

From a tax standpoint, SPX can seem like the better option, but the tax implication in their treatment may not be significant enough to give them much of an advantage.  

Be sure to check with your CPA since we don’t give tax advice and tax rules can and do change.  

SPX Vs SPY Actual Cost 

Again, another important distinction is that SPX contracts are much more expensive than SPY. For example, SPY options usually trade at around $120, while SPX options trade at around $1,200. This makes sense due to the fact that SPX options with the same strike price and expiry as their SPY counterparts will always equal 10x of one SPY option.  

Are SPX American or European?  

SPX options are European-style and can therefore only be exercised at the time of expiration. There is no risk of early exercise when using European-style options which is a nice advantage for option sellers. European-style options are cash settled.  

The cash received at close is automatically deposited in the account of the option’s owner. Cash from investors who are short at the time of expiration will be removed from their accounts.  

Other examples of European-style options include: DJX: Dow Jones Industrial Average, NDX: NASDAQ 100 Index, and RUT: Russell 2000 Index.  

When using European-style options, owners will lose their options but will receive the intrinsic value of the option in cash. Traders may find that the cash settlement feature to European-options is more convenient.  

Are SPY Options American or European? 

SPY options are American-style trading options, which gives option buyers the freedom to exercise these options before they expire. You will find that most equity options are American-style.  

With American-style options, you receive the actual shares, which means you have the task of offsetting them yourself. This may mean you have to pay an additional commission. There are also several risks that come from holding shares for a limited amount of time.  

SPY options are an ETF or exchange-traded fund. ETFs are marketable security options that act as an index fund but can be traded, making them more like a common stock.  

Risk of Early Assignment when using SPY 

American-style trading options possess the risk of early assignment, but this is usually only a problem if the option has very little time value or premium left. 

Why is Implied Volatility Higher for SPY Options Than SPX? 

Since the implied volatility is always based on the option price, SPY options will always be higher. This is because American-style options are usually more expensive when using the same underlying asset.  

Liquidity of SPX and SPY Options 

ETFs are known for being broad-based. Since SPY options have tighter markets, they are known to be more liquid than SPX options. SPY options usually feature a tighter speed between their bid and offer than SPX options making them more price efficient for traders and investors. 

Because of its tighter markets, SPY options tend to have better price fills than SPX. In some cases, traders have found that the money saved from commissions end up lost in the spread between the bid and the offer when trading SPX.  

Though SPY options are considered more liquid than SPX, both SPY and SPX are still both considered very liquid, because of their high trading volume. The high trading volumes of these options make them easy to enter and exit which is a huge benefit for option traders. 

SPY Vs SPX Options Expiration 

When using SPX, component stocks weigh themselves according to the market value of outstanding shares. While SPY options stop trading at the close of business on expiration Friday, SPX expires at different times, making them a bit more complicated.  

Trading for most European-style trades stops trading at third Thursday of each month. The next day’s opening price is where the settlement price comes from. This means that the price of an option can increase or decrease greatly, based on the price of the index on Thursday at closing to Friday at opening. There are usually no delays in the settlement when using SPX options.  

Decreasing your risk can be done by stopping your position before closing on Thursday. Avoiding any adverse movements will greatly decrease your risk in the long run. You may find that there’s no way to decrease the potential adverse price change in the option. This could increase the risk on the trade.  

When SPX options expire on the third Friday of the month, they stop trading the day before that third Friday. This is only the case for SPX options that expire on the third Friday though. All others expire the same as SPY options.  

Which Works Best for You – SPX or SPY? 

Both SPX and SPY options are good trading vehicles when you are trying to profit off any increases or decreases in the S&P 500 index. There are benefits and disadvantages to both, so it is important to understand and choose which option will work best for you.  

It is also important to consider the importance of risk and liquidity when choosing between these two popular option reading vehicles.

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