SPY vs. SPX Characteristics

Posted on February 6th, 2013

On Monday we wrote about how using the options on the S&P 500 cash settled index, SPX, is an effective way to provide hedged exposure to the broad market. It has spurred many questions from you, our readers, about using options on the ETF, SPY, instead of using SPX. So we thought we’d give you a comparison of the different characteristics of these two vehicles. As a reminder, at Buy and Hedge, we like to use these vehicles as a means of creating broad market exposure in a hedged and protected way.
The Underlying Vehicle
  • SPY is an ETF and hence you can hold the actual asset. This allows all option strategies to be utilized.
  • SPX is a cash settled index that cannot be held, so options are the only means of exposure. This eliminates some strategies such as married puts, covered calls, or collars.
Size and Pricing
  • SPY trades around 150 and investors can buy just a single share if they like. This makes SPY a good choice for smaller investors.
  • SPY has tight Bid  / Ask spreads...like a penny tight. This is also true for the options. SPY is one of the few symbols that doesn't trade in nickel increments, so fills are easy to get  and market makers don’t take you to the woodshed on execution
  • SPX is marked at virtually 10 times the SPY and trades around 1500. Add to that the options 100 multiplier and a single contract give you exposure of $150,000 worth of market control. This is significantly more than SPY.
  • Due to SPX’s size, option Bid / Ask spreads are wider. Even ATM strike options can be more than $1 apart. This means you have to know what price you want to trade at and not settle for the natural prices posted.
  • SPY has about a 2% dividend, so when held it can generate some income. The options market knows that and it will impact pricing of calls and puts especially around the ex-dividend dates.
  • SPX has no dividend so income strategies will need to be executed by generating time premium.
  • SPY gains and losses are treated just like stock. Long-term rates only apply when positions are held for 1 year or more and dividends get their special rate. Positions held less than a year get 100% short-term treatment.
  • SPX options are considered 1256 contracts and hence get favorable tax treatment. This means any position held less than a year gets a beneficial treatment of 60% long-term and 40% short-term.
  • Both symbols have weeklies, monthlies, quarterlies and LEAPs option expiration periods.
  • SPY uses has American Style options which means the long holder can assign at any time they like. This can become an issue around dividend time. For example, sellers of calls that have gone deep into the money are at risk of assignment as the long holder may want to own the stock right before the ex-dividend date. There are times an early assignment is fine, as well, but the bottom line is there’s no way to insure short options wont get assigned early
  • SPY options expire just as most stock options do, on the Saturday following the 3rd Friday of the month. That means the last time the option can trade is on the 3rd Friday of the month. The options are compared to the closing price on Friday afternoon. This lines up nicely.
  • SPX uses European Style options which means they can only be settled at the time of expiration and eliminates the risk of pre-assignment.
  • SPX also has an unusual settlement process. The options technically expire at the open of the 3rd Friday of the month. They are compared to a settled price once the SPX has opened for trading and is calculated sometime after 9:30 am. This means that the last day the options can trade is Thursday afternoon. The can expose SPX option holders to a gap risk between the close and open of Thursday to Friday.
All of these are factors that go into consideration when deciding to invest, so it’s important to get informed. These different characteristics will provide advantages and disadvantages depending on what tactics you choose to use when making your investments. Look for a post on Friday that will get to some criteria to consider when choosing the right tactic or strategy.

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