For those without prior experience, options trading can seem incredibly daunting. What exactly is the “SPX vs SPY,” and why do you have to be concerned about it? This investment has its terminology, making it quite challenging for beginners to understand what people are talking about. While the “option” to buy or sell instruments at a fixed price is a crucial component, it is not the central notion in options trading. This straightforward yet effective tool can be incorporated into a diversified investment plan when the markets are exceptionally volatile or nearing bear territory.
In this article, we’ll dive deep into SPX vs. SPY options, two of the most widely traded options on the S&P 500, a critical index fund that many traders and investors use as a shorthand for the whole stock market. The S&P 500 has lost 18.4% of its value this year, but market watchers can’t agree on whether it will continue to decline or will only rise. Fortunately, options trading enables us to bet on any outcome and limits losses if our forecasts are inaccurate.
We’ll cover everything from the foundations of options trading to determining whether SPX vs. SPY options are more suited to your individual financial goals, so come on in and learn the ropes with us.
List of Contents
What is SPY?
The SPDR S&P 500 ETF Trust (ticker symbol: SPY) was the pioneering exchange-traded fund (ETF) launched in 1993. Exchange-traded funds (ETFs) are diversified portfolios of stocks, bonds, and other assets that aim to replicate the performance of a particular index, commodity, or market segment. SPY is an exchange-traded fund (ETF) created to follow the performance of the Standard & Poor’s 500 (S&P 500) index, which is composed of the 500 largest publicly-traded firms in the United States.
By purchasing SPY or a comparable exchange-traded fund (ETF), investors gain exposure to all 500 companies that make up the S&P 500 index for a fraction of the price of buying each stock separately. The S&P 500 Index is a popular investment option since it is widely viewed as a leading indicator of the stock market.
Slightly over seventy-five percent of the fund is invested in information technology, healthcare, consumer discretionary expenditure, financial services, and communications companies. However, the S&P 500 contains companies from many other economic areas. Apple, Amazon, Tesla, Meta (Facebook), and Alphabet are just some well-known corporations represented in the fund (Google).
What Are SPY Options?
Buying SPY shares, the fund itself is a popular option for many investors. Many other traders and investors prefer SPY options trading, agreeing to purchase or sell SPY shares at a predetermined price or strike point on or before a specified date.
Assume we have just purchased a SPY options contract with the following parameters: $300 strike price, 30-day expiration. Here we have an illustration of a call option. We decide to exercise our call option after two weeks because the price of SPY shares has risen to $350. According to the terms of our arrangement, we will purchase 100 shares of SPY for $300 per share.
After accounting for commissions and trading fees, we would earn $50 per share on the open market if we were to sell the shares now that their value has increased to $400.
A put option operates similarly, only in the other direction. Consider the case where we invested $300 in a SPY put option with a 30-day expiration and the same strike price. In this scenario, we would profit from the spread between the $300 purchase price of the options contract and the $250 market price of SPY shares at the exercise time.
What Are SPX Options?
Different from the SPY exchange-traded fund, which is backed by physical shares of stock of firms included in the S&P 500, the SPX is a theoretical index determined by the price of the S&P 500. Due to the lack of tradable shares makes the direct investment into SPX impossible.
Traders can speculate on whether the SPX’s price will rise or fall by buying and selling options on the index.
It is possible to trade SPX options on the open market, though buyers and sellers will generally need to be registered with a brokerage firm specializing in options trading. Options on the SPX can be bought and sold in a variety of increments and time frames, including daily, weekly, and monthly.
What’s the Difference Between SPX vs. SPY Options?
| SPX | SPY | |
|---|---|---|
| Compensations | None | Per-quarter |
| Technique | European-style option | American-style option |
| End Date | Third Friday of the month | Close of business on end Friday |
| Payment | Settled in cash | Settled in shares |
| Worth | Often 10x SPY | Less than SPX |
Compensations
Option holders are not often eligible for dividend payments. SPY does, however, distribute dividends quarterly. This is crucial because if you trade using in-the-money (ITM) call options, you can assert them to receive the dividend. Owning shares and putting in a call option on SPY before the ex-dividend date will accomplish this (called a covered call option).
If you trade ITM calls, remember that most calls will be exercised on Friday of the expiration week to collect the payout. Therefore, option holders cannot afford to miss out on the dividend.
SPY has its ex-dividend dates on the third Friday of March, June, September, and December. If that day is not a business day, it will be moved to the following business day.
Technique
European and American trade styles are distinct from one another. In contrast to American options, which can be exercised at any time before their expiration date, European options cannot be used until the expiration date has arrived.
In the United States, traders who purchase SPY options have the right to do so at any time (before expiration).
End Date
Trading in SPX options with a third Friday expiration date ends the day before that date (the third Thursday). The settlement price is calculated by adding the previous trading day’s available prices of all stocks in the index on the third Friday of every month. Expiration cycles always end at this price. On Friday, for SPY options, expiration means the end of trading for the week.
Payment
SPY options are paid out in shares. Equity of the ETF will be purchased (or sold) when you assert your options. If you exercise an SPX option in the money, the proceeds will be deposited into your brokerage account in cash.
Worth
A similar multiplier applies to the value of SPX options compared to SPY ones. By illustration, on April 9, 2020, the market closed with the SPX at 2,789.82 points and the SPY at $278.20.
It is crucial to understand that the value of one SPX option at the same strike price and expiration is roughly ten times that of one SPY option. As a result, the value of one point on the SPX was $100.5.
The SPX was at 2,660 points, and the SPY was about $266. The holder of an in-the-money SPX option can acquire $266,000 worth of the index ($100 multiplied by 2,660).
The holder of a single SPY option has the right to purchase $26,600 worth of ETF shares (10% of $266,000).
SPY vs. SPX: Which Is Right For You?
Because SPX’s underlying assets are not traded, no SPX shares are available for purchase or sale. Traders can use the options to speculate on how the S&P 500 will perform. SPX is not an accurate index, but its price is determined in the same way that an absolute index would be.
This means that it contains 500 different stocks with an equal number of shares. Though the SPX itself may not be traded, futures contracts and options on the index are. Because of this, SPX options are settled in cash.
Since SPY shares are traded on an exchange, the SPY options are settled in shares. As a result, when you exercise your choice, you become the legal owner of shares.
How you intend to go about accomplishing your objectives will determine which choices are best. SPY may be your best option if you want to acquire shares to hold or resell them physically. SPX is a fantastic option if you’d instead make a trade that benefits you monetarily.
Some additional danger is present when trading SPY options. As an illustration, let’s say you end up with shares the Monday after your option expires. As the expiration date approaches, the value of those shares will rise, and you will be required to pay the higher price rather than the Monday value. Consequently, if the share price drops on Monday, you will pay more than the shares are worth. However, if the cost goes up, you’ll still pay less than the going rate.
It’s important to note that SPY options are on an exchange-traded fund (ETF), while SPX options are on the underlying prices of the index itself and follow a different set of rules. This has significant ramifications for using your options, and you should be aware of them. The amount of money you have available to buy the options is also essential because of the disparity in value (and settlement).
SPX could be a good option if you have more capital to invest and aren’t concerned with receiving dividends. However, SPY could be a better option if you’re strapped for cash but could benefit from dividends.
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Source: Tokenist, The Balance