If you need options on the S&P 500 the CBOE’s SPX series is one of the most popular solutions in the marketplace. The CBOE continues to enhance this product with additional expirations—the latest being the addition of options expiring on Tuesday and Thursday afternoons in the spring of 2022. These products were immediately successful. With all the days of the week covered it will interesting to see where the Cboe goes next, I suppose more days with AM expiration might be possible, but I think it would be more likely for them to add mid-day expirations next.
In May 2017 the CBOE did some welcome cleanup on the SPX options. Previously the weekly SPX options that expired on the same Friday as the monthly SPX option series carried the SPXPM ticker. The SPX and SPXPM options differed in that the SPX options expire at open on those Fridays and the SPXPM expired after market close. Other than expiring on the same day as the SPX options the SPXPM options were no different than the SPXW options expiring on other Fridays. Not surprisingly this difference created problems. Since the SPXPM options didn’t show up in most SPX option chains most people didn’t even know that they existed. In addition, most brokers’ software did not recognize that the SPXPMs were effectively SPXWs so if you tried to use them in a calendar spread with other SPX/SPXW options you were out of luck. The CBOE has rationalized this situation by renaming the SPXPM as SPXW options which in hindsight was the right symbology all along.
First, about the money, SPX/SPXWs are:
- 10X the size of SPY options, reducing commission costs if you are trading positions of that size. Their price is roughly 10X the equivalent SPY option. If the SPX options are too large for you the CBOE also offers XSP contracts which are approximately the same notional size as SPX options. XSP options have the same characteristics as SPX options but in the past tended to have wider spreads and not as much liquidity. My sense is that these are increasing in popularity.
- Considered taxable as section 1256 contracts—generally 60% of your gains are treated as long-term, regardless of how long you hold them
- Cash-settled so there is no need to close out a trade just to eliminate the risk of an option being exercised, or expiring in the money and triggering a buy or sell of the security.
SPX/SPXWs reduce aggravation because:
- They eliminate pin risk, and any other scenarios where you end up long or short securities when your options expire in the money
- They can only be exercised at expiration (European style), so there is no risk of early assignment unbalancing a spread position. You don’t have to worry about ex-dividend dates triggering assignments.
- For SPXW options there are no delays in settlement—the opening settlement price of SPX (ticker SET) can sometimes be delayed an hour or more because order imbalances delay trading on some stocks. The market close is usually more orderly.
- SPXW options are easier to trade into expiration because you don’t have the overnight risk associated with the AM expiring SPX options. You don’t have to worry about the market gapping up or down before market open—instead, you have the relatively more predictable market close dynamics to work with.
I’ve traded SPX/SPXW options for a while now, and there’ve been a few surprises, some good, some bad.
- There are eight flavors of SPX options:
- The standard AM settled options that expire on the morning of the third Friday of the month (SPX). These are floor traded and tend to have relatively wide bid/ask spreads. Their expiration value is published under the ticker SET (^SET for Yahoo Finance).
- Seven PM settled flavors: each day of the week, the End of Month, and the Quarterlys. All of these show up under the SPX option chains, but their ticker is SPXW. The Quarterlies will trump the Weeklys and the End of Month if they all fall in the same week. The PM expiring options use the standard S&P 500 Friday close SPX (^GSPC for Yahoo Finance) as their expiration value.
- If you want Friday PM settlement on the traditional monthly expiration week you must use the SPXW symbol not the SPX symbol—user beware.
- The minimum increment on prices even with spreads is $0.05
- Close to the money strikes are offered at 5-point intervals (e.g., 3730 / 3735), the equivalent on SPY options would be 373 / 373.5. These 5-point intervals enable tight credit/debit spreads and better resolution in placing positions.
- The bid / ask spreads on AM-settled SPX options tend to be wide, the PM-settled options are somewhat better. For SPX options, a limit order halfway between the bid and ask will usually fill. Never use a market order—you are leaving money on the table. This is one area where SPY options are superior.
- Non-expiring SPX/SPXW options trade 15 minutes after the regular market close. Expiring options stop trading at 4 PM ET.
- Even when AM expiring SPX options have expired, some brokers’ software (e.g. Schwab and Fidelity) will not consider them closed until the following Monday. This is problematic if you have a calendar option position in place with the expired options as the short leg. A workaround for this in order to effectively close out your long position is to roll it up to a much higher strike. This requires some margin, but at least you can effectively cover your position.
- You can create “covered call” type positions in some cases using the S&P 500 ETFs SPY and IVV. For more on this see Covered Margin Treatment for Short, Cash-Settled Index Options.
Trading SPX options in IRA accounts can have some wrinkles. Some brokers might not allow cash-settled index options such as SPX spreads in IRA accounts. Fidelity, Schwab, and TDI support vertical spreads on index options.