Hey Traders,

Two of the most common trading vehicles used by traders are S&P 500 (Ticker: SPX) options, and SPDR S&P 500 ETF (Ticker: SPY) options.

On their surface, these two seem quite similar …

But there are a few key differences you’ll want to note if you plan to trade them.

First, we need to look at the difference between the SPX and SPY themselves.

The S&P 500 is an index fund which tracks 500 large equities. The S&P 500 is not something you can buy shares of – it is simply a performance measure for the equities that it holds.

The SPY, however, is an exchange traded fund (ETF) that holds a portfolio of stocks to mirror the S&P 500, but tracks the index at 10% of the index’s price. So, for example, while the S&P 500 closed at 3,900.86 on Friday (top chart), SPY settled at $389.80 (bottom chart).

As you can see, the SPX and SPY do move in about perfect tandem.

When looking at SPX options versus SPY options, there are even more particulars you want to be aware of before you trade.

First and foremost, SPX options are cash settled. Since you can’t own shares of the SPX, SPX options trades pay out cash at expiration, as opposed to delivering shares.

Meanwhile, since SPY itself is an equity, it is physically settled, meaning you can be paid in (or owe) shares at expiration.

SPX options are European-style options, meaning they must be exercised on their expiration date; they can not be exercised early. On the other hand, SPY options are American-style, so they can be exercised (or assigned!) before their expiration date. 

Speaking of expiration, SPX expirations can get a little tricky. At this point, there are S&P 500 options offered that expire on every single trading day of the week. However, some SPX options that expire on the third Friday of the month, which actually stop trading the day before, and their settlement price is based on the opening price of the index. This is crucial to know, because if you are counting on Friday’s price-action for your trade, you will find yourself very disappointed!

SPY options, on the other hand, are rather straightforward, expiring at the close on Friday each week.

There is also the not-so-small issue of cost.

Take a look at how much a in-the-money or near-the-money option in SPX will cost you …

For most traders, that’s quite a hefty price tag!

Meanwhile, SPY options trade at approximately 1/10 of the cost of SPX options.

For most retail traders, the cost of trading SPY options is much more palatable. The lower cost also means it is more affordable for retail traders to buy multiple contracts, enabling them to leg in and out of trades.

The lower overall price also gives the appearance of lower bid/ask spreads … however, when considering the price of SPX options versus SPY options, the bid/ask is not always as large as it may first appear, on a percentage basis.

In terms of pure number of contracts traded, SPY generally has better liquidity than SPX. 

Take a look at Friday’s trading volume and open interest in SPY options:

Meanwhile, the S&P 500 options may have overall lower volume …

But given the 1:10 ratio of SPX and SPY, the actual liquidity may not have quite as large of a discrepancy as it might seem on the surface.

Either way, for retail trading, liquidity in either is not likely to be much of an issue (unless, perhaps, you go for deep out-of-the-money strikes, with very little volume).

Another thing to note about SPY options is they offer dividend yields in March, June, September, and December, and therefore you will want to take this into account when planning your trade (or exercising your trades!).

While S&P 500 options do not offer dividend yield, they do get preferential treatment by the tax man; 60% of SPX options profits are taxed at the long-term gains tax rate, so you pay lower taxes on your SPX wins.

However, you will want to keep an eye on your broker’s cost of doing business, because some brokers charge an index fee to trade SPX options. 

Generally, SPY has gained more popularity among retail traders, simply because of its affordability and accessibility. Not having to pay thousands of dollars for a single contract definitely has an appeal, and the ability to purchase more contracts with a smaller account has distinct advantages, both from a risk-management perspective, as well as when considering trading strategies and partial profit-taking.

Overall, there is no one “right answer” when it comes to which is best.

Choose based on your overall account size, risk tolerance, and preferred trading strategy!

Your Only Option,

Mark Sebastian