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Important Differences for Traders. SPX vs. SPY

Traders keep asking me what is better to trade – SPX or SPY. I do not see much difference between the two. To trade SPY and achieve the same amount of credit at the same strikes as with SPX just sell 10 contracts of SPY and you get the same results.

I personally prefer SPX but you may like SPY to trade your options.

Here are some differences between the two:

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.

Currently SPX options most often expire on Mondays, Wednesdays and Fridays each week. SPY weekly options only expire on Wednesdays and Fridays. So for those wanting to trade no more than 1 day before expiration, the SPX offers the most trading opportunities

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.

Currently the IRS treats SPX index options differently than SPY options. SPX options get special section 1256 treatment, which allows investors to have 60% of the profits made in trading treated at a long term tax rate. So for many the SPX options can offer a tax advantage.

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