Market Insights

The S&P 500 is the world’s most heavily traded stock index and there are several ways for options traders to take positions.

Today we’ll compare different methods like using index options or contracts on the popular SPDR S&P 500 (SPY) fund. It can be useful to understand some details because the various instruments have important differences despite following the same underlying price action.

SPX vs SPY

The S&P 500 was launched in 1957 and is current maintained by S&P Global (SPGI). It tracks 500 of the largest U.S. companies and is designed to follow leading sectors of the economy.

As an index, the S&P 500 is a statistical construct and not a security. Customers cannot buy shares, but they can trade options (as we’ll cover below).

SPY, on the other hand, is an exchange-traded fund (ETF) that tracks the S&P 500 index. It has ordinary shares that can be bought and sold — similar to stocks like Apple (AAPL) or Tesla (TSLA). (Each $1 of price on SPY represents about 10 points on the index.)

SPY is typically the most active symbol in the equity market and the most active underlier in the options market, according to TradeStation data.

SPX Options

The S&P 500 index uses the symbol $SPX.X on TradeStation’s charts, but its options are associated with two tickers:

• S&P 500 Index Options ($SPXW.X): Represents 100 times the index level. (This is similar to ordinary stock options, which represent 100 shares.)
• Mini-SPX ($XSP.X): Represents 10 times the index level.

Bullish traders expecting higher prices may consider buying calls or call spreads. Bearish traders expecting lower prices may consider buying puts or put spreads.

These calls and puts can be accessed on all of TradeStation’s platforms. (The image below shows OptionStation Pro, included in the desktop platform.)

It’s important to know that SPX options use “European” settlement, making them different than the contracts associated with ordinary stocks.

European settlement means that the options can only be exercised at expiration and settle in cash. In other words, a client might have purchased calls for $150 and they’re worth $200 at expiration. In that case, he or she would receive a $50 credit in their account. They’ll never end up owning SPX directly because the index doesn’t have shares. (The same is true for being short.)

SPX options typically cost more than SPY options because of the index’s higher nominal price.

SPY Options

SPY options have “American” settlement, similar to companies like Microsoft (MSFT) or Meta Platforms (META). That means they can be exercised at any time to take positions in SPY shares. (This is because SPY has shares just like MSFT, META or other stocks.) They also have assignment risk.

This means a customer holding in-the-money SPY calls through expiration will automatically buy the stock at the strike price. (This assumes they have sufficient capital. If they don’t, then the operations desk will intervene to exit the position before expiration.)

The same applies with puts. A customer owning in-the-money puts through expiration will be assigned a short position. A customer short in-the-money puts through expiration will be assigned a long position in SPY.

As a result, customers trading SPY options should be mindful of expirations.

SPY options typically cost less than SPX options because the ETF costs about one-tenth the value of the index. (This gives them a similar notional cost to the Mini-SPX options.)

Tax Treatment

SPX options are covered by Section 1256 of the Internal Revenue Code, which may give them beneficial tax treatment versus SPY options.

SPX options may have a 60/40 tax split, with 60 percent long-term capital gains and 40 percent short term — regardless of the holding period. They’re not subject to wash-sale rules. This may create more favorable tax treatment.

SPY options, on the other hand, are treated to stocks. Short-term profits are treated as short-term capital gains and trades are subject to wash-sale rules. SPY also pays dividends, which are typically treated as ordinary income.

Note: Tax treatment of options is complex and may vary. Section 1256 treatment generally applies to broad-based index options, but traders should confirm applicability with a tax professional. This material is for informational purposes only and is not intended as tax advice. Investors should consult a qualified tax professional regarding their individual circumstances.

Dividends and Options

Dividends represent another difference between trading SPX and SPY options.

As an index, SPX doesn’t pay dividends and its price doesn’t reflect shareholder payouts. As a result, dividends have no impact on SPX options.

SPY, on the other hand, pays a quarterly dividend to shareholders of record near the end of each quarter. As a result, prices normally drop after the ex-dividend date. Market makers anticipate those moves, often making call options cheaper before the event and puts more expensive. (Otherwise traders could be “free money” from the price drops.)

Options Liquidity

Options have different degrees of liquidity based on activity and prices. Typically underliers with more volume tend to have narrower bid/ask spreads, which results in lower transaction costs.

Of the products discussed above, SPY options are the most active and typically have the tightest spreads. Here are some examples based on current pricing for at-the money calls and puts expiring this coming Friday:

• SPY: bid/ask spreads are about $0.02.
• $SPXW.X: bid/ask spreads are about $0.20 (but its notional value is 10 times higher).
• $XSP.X: bid/ask spreads are $0.12-$0.13 (it has the same notional value as SPY).

SPX vs SPY Compared

To recap, here are some of the main similarities and differences between SPX and SPY options explained above:

Exchange Traded Funds (“ETFs”) are subject to management fees and other expenses. Before making investment decisions, investors should carefully read information found in the prospectus or summary prospectus, if available, including investment objectives, risks, charges, and expenses. Click here to find the prospectus.

Performance data shown reflects past performance and is no guarantee of future performance. The information provided is not meant to predict or project the performance of a specific investment or investment strategy and current performance may be lower or higher than the performance data shown. Accordingly, this information should not be relied upon when making an investment decision.

Options trading is not suitable for all investors. Your TradeStation Securities’ account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See www.TradeStation.com/DisclosureOptions. Visit www.TradeStation.com/Pricing for full details on the costs and fees associated with options.

Margin trading involves risks, and it is important that you fully understand those risks before trading on margin. The Margin Disclosure Statement outlines many of those risks, including that you can lose more funds than you deposit in your margin account; your brokerage firm can force the sale of securities in your account; your brokerage firm can sell your securities without contacting you; and you are not entitled to an extension of time on a margin call. Review the Margin Disclosure Statement at www.TradeStation.com/DisclosureMargin.