SPX Options vs. SPY Options

Know the key differences before trading these index options.

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When using options to invest in the S&P 500 Index, you can trade an index with the ticker SPX or an exchange-traded fund (ETF) with the ticker SPY. These options are ideal for trading. Since both are very liquid with high trading volume, it's easy to enter and exit a position.

S&P 500 Index (SPX)

SPX, or the S&P 500 Index, is a stock index based on the 500 largest companies listed on the New York Stock Exchange (NYSE) and Nasdaq. A company's market capitalization (or "market cap") is it's share price multiplied by the number of outstanding shares. This number is used to determine its market value.

This is not how the Dow Jones Industrial Average (DJIA) works, however. The DJIA is index made up of an equal number of shares (adjusted for stock splits) of the 30 companies on the list. SPX is a capitalization-weighted index.

The weight of a company in the index is the market cap of that company as a percentage of the total market cap of all companies in the index. For example, if an index has a total market cap of $100 billion, and one company has a market cap of $1 billion, its weight is 1%.

The market caps of most stocks change daily. The list of the 500 specific stocks in the index is rebalanced once per quarter in March, June, September, and December.

The 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. This means it has exactly the number of shares of each of the 500 stocks. So, while the SPX itself may not trade, both futures contracts and options do.

SPDR S&P 500 ETF (SPY)

SPY is the ticker symbol for the SPDR S&P 500 ETF. When buying or selling the shares on an exchange, the transaction price of SPY reflects that of SPX. However, it may not be an exact match, because the market determines its price through an auction.

An SPX option is also about 10 times the value of an SPY option. For example, on April 9, 2020, SPX closed at 2,789.82 points, and SPY closed at $278.20.

The SPY portfolio seeks to provide results that mimic the price and yield (before fees) of the S&P 500 Index. SPY pays a dividend every quarter. This is vital because traders with in-the-money (ITM) call options often exercise them so that they can collect the dividend.

SPX vs. SPY

One key factor is that SPY pays a dividend, while SPX does not. Ex-dividend day is the date when a stock's buyer no longer has the right to receive the last declared dividend.

SPX vs. SPY
  SPX SPY
Dividends None Per quarter
Style European-style option American-style option
Ceases Trading Differs for those that expire on the third Friday of the month At close of business on expiration Friday
Settlement Settled in cash Settled in shares

It is vital to be alert when trading ITM calls, because most such calls are exercised for the dividend on expiration Friday. If you own these options, you cannot afford to lose the dividend

You should know how to decide whether or not to exercise options. This isn't an issue for SPX, however, since it doesn't pay dividends.

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 when they expire. The two styles cease trading at different times. SPY options cease trading at the close of business on expiration Friday, but SPX options are a bit more complex.

SPX options that expire on the third Friday stop trading the day before the third Friday. On the third Friday, the settlement price is determined by the opening prices of each of the index's stocks. This price is the closing price for the expiration cycle.

All SPX options expire like SPY options—at the close of business on expiration Friday. However, those that expire on the third Friday of the month do not.

SPX Options vs. SPY Options

It's vital to grasp that one SPX option with the same strike price and expiration is approximately 10 times the value of one SPY option. Each SPX point is the same as $100.

For example, suppose SPX were at 2,660 points, and SPY traded near $266. One at-the-money SPX option gives its owner the right to buy $266,000 worth of the underlying asset ($100 x 2,660).

One SPY option gives its owner the right to buy $26,600 worth of ETF shares (10% of $266,000). If you trade a lot of options at once, it might make more sense to simply trade five SPX options rather than 50 SPY options.

That plan could save significant dollars in commissions. However, it also means trading European options and trading an underlying asset with no dividend. This may not be best for every trader.

The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.