Should I trade SPX or SPY Weekly Options?
There are many ways to trade the markets. Our focus is on the S&P 500 index and that is our area of expertise. Focusing on this index alone has allowed us to become very good at forecasting the direction and intraday movement. Traders can use our forecasts to trade futures, weekly options, and ETFs. We are weekly options traders, that is our focus. As option traders there are two primary ways to trade this index using either the SPY or the SPX weekly options.
Each trader should fully research the pros and cons of trading each of these weekly options. The following discussion is simply meant to introduce you to the differences. There is no single answer to which is the best to trade, it depends upon your unique situation.
SPX weekly options are cash-settled while SPY weekly options are not. This means if you end up with in-the-money SPX call options at expiration you will end up with cash in your account. As opposed to being long SPY stock if you held in-the-money SPY options. We always exit before the close of trading, so not normally an issue. But some brokerages will automatically exit a SPY weekly option that is in-the-money on expiration day before the close. Please consult your broker for details, as this can be a key difference of which to trade on expiration day.
Liquidity & spread
SPX weekly options offer good liquidity but the spreads are often quite large. SPY options generally have much greater liquidity and have smaller spreads than SPX options. This often provides the opportunity to have more favorable fills on orders in the SPY options.
SPX options are generally much more expensive than SPY options. The SPY options are 1/10 the size of the SPX options. This lower price may be attractive to traders wishing to invest less dollars per trade. However, this means one needs to purchase more contracts of the SPY options to equal the same value of the SPX options. This means higher commission costs for most traders. So it will normally cost more in commission to trade the same dollar amount in the SPY vs the SPX.
Please consult a tax professional for specific tax advice. But 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.
Which is better SPY or SPX options? It all depends upon your situation. SPY options are cheaper, more liquid, smaller spreads and get taxed at short term tax rate. SPX options are more expensive, still liquid, larger spreads, often lower commissions and better tax consequences for most. So each trader must choose which is best for their unique situation.
At SPX Option Trader we provide information for both. Our SPX Daily Outlook provides information for both SPX and SPY weekly options.