SPX Options vs. SPY Options
Trading Index Options
When using options to invest in the Standard & Poor's 500 Index, there are two very similar-looking assets from which to choose: SPX and SPY. These options are ideal for trading because they are very liquid with high trading volume, and it is easy to enter into, and exit, a position.
All about SPX
The term "largest" refers to the market capitalization (stock price multiplied by the number of shares outstanding) of the stocks.
Unlike the Dow Jones Industrial Average which is 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. Translation: The weight of a company in the index (i.e.., the number of shares represented in the portfolio of stocks) is equal to the market cap of that company divided by the total market cap of all the companies in the index.
The underlying asset itself does not trade and there are no shares to be bought or sold. SPX is a theoretical index whose price is 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 options certainly do.
All About SPY
SPY (nicknamed "spiders") is an ETF (exchanged traded fund). When buying or selling the shares (on an exchange), the transaction price is very nearly that of SPY, but it may not be an exact match because Its market price is determined just like that of any other security - by an auction market.
The investment managers built a portfolio that seeks to provide investment results that (before expenses) mimic the price and yield performance of the S&P 500 Index. NOTE: The portfolio may only approximate that of the SPX index, but the results are "good enough" to suit the huge number of people who trade the shares.
SPY pays a quarterly dividend, and that is important because in-the-money call options are often exercised so that their owners can collect the dividend.
Important Differences for Traders. SPX vs. SPY
- SPY pays a dividend and SPX does not. Ex-dividend day is usually the 3rd Friday of Mar, Jun, Sep, Dec, and that corresponds with expiration day. 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 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 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 (i.e., 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 (the ITM value of the option is transferred from the option seller's account to that of the option owner.
- One SPX option (same strike price and expiry) is worth approximately 10 x the value of one SPY option. This is very important. SPX trades near $1,200 and SPY trades near $120. Thus, one at-the SPX money call option is an option to buy $120,000 worth of underlying. 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 may pay 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 with no dividend. That will not be suitable for every trader.
Your portfolio has two ways to use the S&P 500 index as the underlying asset. You can trade an index (SPX) or an ETF (SPY).