SPX Options vs. SPY Options

Find out the differences before trading these index options

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When using options to invest in the Standard & Poor's 500 Index, there are two very similar-looking assets from which to choose: You can trade an index (SPX) or an ETF (SPY). These options are ideal for trading because both are very liquid with high trading volume, making it easy to enter into, and exit, a position.

All About the SPX Index

SPX, or the Standard & Poor's 500 Index, is a stock index based on the 500 largest companies with shares listed for trading on the NYSE or NASDAQ. The term "largest" refers to each firm's market capitalization or its stock price multiplied by the number of shares it has outstanding.

Unlike the Dow Jones Industrial Average, an index composed of an equal number of shares (adjusted for stock splits) of each of the 30 companies, SPX is a capitalization-weighted index. The weight of a company in the index, or the number of shares represented in the portfolio of stocks, equals the market cap of that company as a percentage of the total market cap of all the companies in the index. 

The underlying asset itself does not trade, and it has no shares available to be bought or sold. SPX functions as a theoretical index with a price calculated as if it were a true portfolio with exactly the correct number of shares of each of the 500 stocks.

Because the market capitalization of most stocks changes from day to day, the list of the 500 specific stocks in the index is updated periodically.

The SPX itself may not trade, but both futures contracts and options certainly do.

All About SPY

SPY (nicknamed "spiders") is an exchange-traded fund (ETF). When buying or selling the shares on an exchange, the transaction price very nearly replicates that of SPX, but it may not be an exact match because the market determines its price just like that of any other security, through an auction.

The investment managers built a portfolio that seeks to provide investment results that mimic the price and yield performance (before expenses) of the S&P 500 Index. Although the portfolio may only approximate that of the SPX index, the results are good enough to suit the huge number of people who trade the shares.

SPY pays a quarterly dividend, which is important because traders with in-the-money (ITM) call options often exercise them so that they can collect the dividend. 

Important Differences Between the Two Options

  • SPY pays a dividend and SPX does not. Ex-dividend day usually takes place on the 3rd Friday of Mar, Jun, Sep, Dec, which also corresponds with expiration day. Ex-dividend means the date a stock's buyer no longer has the right to receive the last declared dividend. It is important to be alert when trading in-the-money calls because most such calls are exercised for the dividend on expiration Friday. If you own such options, you cannot afford to lose the dividend and must know how to decide whether or not to exercise. SPX, on the other hand, pays no dividend.
  • SPY options are American style and may be exercised at any time after the trader buys them before they expire. SPX options are European style and can be exercised only at expiration.
  • SPY options cease trading at the close of business on expiration Friday. SPX options are a bit more complicated. All SPX options, except for those which expire on the 3rd Friday of the month, expire as do SPY options, at the close of business on expiration Friday. SPX options that expire on the 3rd Friday stop trading the day before the 3rd Friday. The settlement price, or the closing price for the expiration cycle, is determined by the opening prices of each of the 500 stocks in the index, on the 3rd Friday.
  • SPY options are settled in shares. SPX options are settled in cash, with the ITM value of the option being transferred from the option seller's account to that of the option owner.
  • One SPX option with the same strike price and expiry equates to approximately 10 x the value of one SPY option. Keep this important fact in mind. SPX trades near $1,200 and SPY trades near $120. Thus, one at-the-money SPX call option gives an option to buy $120,000 worth of the underlying asset. One SPY option gives its owner the right to buy $12,000 worth of ETF shares. If you trade a lot of options at one time, it might make sense to trade 5 SPX options rather than 50 SPY options. That plan saves significant dollars in commissions, but it does mean trading European options and trading an underlying asset with no dividend. This won't necessarily be suitable for every trader.