When it comes to index trading, the acronyms SPY and SPX often emerge in conversations among investors. While they may sound similar, they represent distinct instruments that track the performance of the renowned S&P 500 index. For options traders, this makes a difference. Additionally, there are minor nuances in even the price action between the two tickers.
SPY vs SPX YTD, notice the SPY is up slightly more than the SPX over the given period on a percentage basis. Source: Google
Below, we’ll unravel the differences between the SPY SPDR S&P 500 ETF Trust, and the SPX index, shedding light on their characteristics, trading mechanisms, liquidity, fees, and trading considerations.
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SPY: The Popular ETF
SPY, short for the SPDR S&P 500 ETF Trust, is an exchange-traded fund (ETF) that aims to replicate the performance of the S&P 500 index. ETFs are investment vehicles that trade on stock exchanges like individual stocks — in this case, it’s all 500 stocks found in the S&P 500. SPY is the most widely traded ETF in the U.S. market, and it attracts a large volume of investors due to its accessibility and high liquidity. SPY’s price is about 1/10th of the SPX’s value at all times. If the SPX is trading at 4,500, the SPY should be around 450. As such, the option prices will usually correlate. However those option prices, much like the share price of each, can vary, meaning watchful options traders may find a better deal in one or the other at any given time.
Key Features of SPY:
- Share-Based Trading: SPY trades like a regular stock on exchanges. Investors buy and sell shares of the ETF at prevailing market prices throughout the trading day.
- Dividends: SPY typically pays dividends to its shareholders, reflecting the dividend income generated by the underlying S&P 500 stocks. Dividend payouts are distributed to SPY shareholders on a quarterly basis. Of course, option holders will not receive these dividends.
- Options Trading: SPY is one of the most actively traded options contracts, allowing investors to trade options on the ETF with some of the best liquidity available. Bid/ask spreads in SPY options are usually very tight, especially near the money, and near-term.
- 1:10 Price Ratio: With a share size roughly 1/10th the value of the SPX, the SPY offers a cheaper choice for traders and investors.
- Hours of Operation: SPY options can be traded between 9:15AM EST and 4:15PM EST — from 15 minutes before market open to 15 minutes after market close.
SPX: The Index
SPX, also referred to as the S&P 500 index, is a broad-based market index that tracks the performance of 500 large-cap stocks listed on U.S. exchanges. Unlike SPY, which is an ETF, SPX represents the actual index itself and cannot be directly traded. Instead, investors can trade options contracts based on the SPX index.
Key Features of SPX:
- Index-Based Trading: Investors cannot directly buy or sell the SPX index. It serves as a benchmark, reflecting the overall performance of the underlying S&P 500 stocks.
- Fees: While some brokers charge a fee for any options trading, SPX options come with an additional “proprietary fee” on most brokerages, usually priced at $0.65 per contract. That comes on top of any other contract trading fees associated with trading the contract. For instance, in a standard Thinkorswim account, it costs $0.65 to open or close an option contract. In SPX, this would be boosted to $1.30.
- It’s worth noting, however, that the SPX still allows greater exposure relative to fees. In other words, while the fees may have doubled, the leverage is 10:1 relative to similar SPY contracts due to the dollar value of the index. In other words, technically, SPX offers a slightly better deal from a fees standpoint.
- Liquidity: The SPX is fairly liquid, but it can’t hold a candle to the SPY. If you’re used to trading the $0.01-wide bid/ask spreads of SPY options, you’re may find yourself be frustrated at the ~$0.40-wide spreads of the SPX.
- Cash Settlement: Options contracts based on the SPX index settle in cash rather than through physical delivery of the underlying assets. This means that profits or losses from SPX options are settled in cash upon expiration.
- European-Style Options: SPX options follow a European-style exercise, which means they can only be exercised at expiration, unlike American-style options that can be exercised at any time before expiration.
- Tax Considerations: Gains from trading SPX options may have different tax implications compared to trading SPY options. According to Section 1256 of the tax code, trading index options may entitle traders to a 60% long-term and 40% short-term capital gains tax treatment given certain conditions are met. This can happen even if the SPX options are traded on a short-term basis.
- Hours of Operation: The SPX trades 5 days a week, nearly 24 hours a day.
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SPY vs SPX: Choosing Between the SPY and SPX
Deciding whether to invest in SPY or trade SPX options depends on various factors, including your trading objectives, risk tolerance, trading preferences, and available capital. SPY offers the convenience of trading like a stock, providing exposure to the S&P 500 with great liquidity. On the other hand, SPX options are open for more hours of the day, provide traders with larger per-contract position sizes, and may be more advantageous from a tax perspective.
Understanding the difference between SPY and SPX is crucial for investors looking to gain exposure to the S&P 500 index. Consider your trading goals, risk appetite, and familiarity with options trading when choosing between these two instruments.