SPX vs SPY: Which Should You Choose? (Options Trade) 

People are often confused about whether they should trade via SPX vs SPY.

This article bridges the understanding gap and empowers you to make the right decision depending on personal/financial circumstances.

SPX vs SPY Options Graphic



The primary difference between SPX and SPY Options is their style.  SPX is European style, while SPY is American style.

Another significant difference is that SPX options do not pay dividends while SPY does because dividend-paying companies back it.

Options trading via S&P 500 is widely used in the U.S.

In addition, there are various ways to trade options, and essentially you are trying to predict the index's next move.  This is also known as market timing.

Index movement refers to the short-term increase or decrease in the share price of the 500 largest listed companies in the United States.

The index movement can be predicted daily, weekly, and monthly under different options.

However, this article focuses on SPX vs SPY, which works based on a weekly index and ETFs movement.

Let's understand what makes a difference between these two options.


SPX vs SPY Options

The main difference between SPX and SPY Options is the style.  SPX is European style, while SPY is American style.

European style means a trader can exercise the option only on the expiry date.

American style means a trader can exercise an option before the expiry date.

SPY provides more flexibility compared to SPX.

SPX options do not pay dividends to the option holder as they are based only on the index movement.  This contrasts with SPY options that pay dividends because a basket of shares/ETFs backs it.

The dividend payments for SPY options are paid quarterly.

Another big difference is how trades are settled.

SPX is settled in cash on the expiry date.

SPY is based on the ETF; therefore, the settlement is made in the shares.

However, a SPY option holder can exercise the right at any time before expiry.

SPX's value is ten times the value of SPY.  Therefore, the value of SPY is ten times less than SPX.

Lastly, SPX has lower liquidity for these options compared to SPY.  This decrease in liquidity is because the commission to enter the option is higher.

Further, these options cannot be exercised before the expiry date.

Consequently, SPY has higher liquidity for options trading.  This is because the commission payable on these options is lower.  Further, these options can be exercised at any date before the expiry.

The following sections will further discuss SPX vs SPY option dividends and how they are taxed.


Why Should You Collect Dividends On SPY?

Collecting dividends on SPY is vital because if you are trading in the money (ITM) call option, you need to compare market value and the exercise price.

So, if the market value exceeds the strike price, you can exercise your right and purchase the underlying security.

At this time, it's essential to consider an element of dividend as it comes with an option exercise.  So, an option should be exercised before the ex-dividend day to ensure collection.

In the case of SPY, the ex-dividend dates include the third Friday of March, June, September, and December.


SPX vs SPY Taxes

Gains associated with SPX trading are taxed as long-term under section 1256.  Accordingly, under the guidance of this section, 60% of the gain is long-term capital gains tax.  The remaining 40% gain is ordinary income and short-term gains.

It's important to note that the tax rate for capital gains is lower than the tax rate on ordinary income.

Therefore, investors are given tax relief for the gain made on SPX options.

SPX vs SPY Taxes

On the contrary, the SPY option is highly liquid, less expensive, and frequently traded.  So, it's treated as a short-term gain.

Therefore, it's taxed as ordinary income, higher than the capital gain tax rate.

SPX Trading Is Taxed as 60% Long-Term Gains and 40% Short-Term Gains.

SPY Trading Is Taxed as Short-Term Gains.


Is It Better To Trade SPY or SPX Options?

The answer depends on your investment preference.  If you prefer tax-favored options, then SPX options are best.  If you prefer more liquidity and flexibility, then SPY options are best.

Also, if you want to realize a gain in cash, it can be an excellent option to trade in SPX.

On the other hand, if you build a portfolio of shares, it can be a good idea to opt for SPY.

SPX vs SPY Comparison Chart

Further, if you are looking for the best tax rate, it makes sense to choose SPX, as less tax is applied to the gain.

However, if you intend to invest for a short period, it can be good to trade via SPY because of higher liquidity and large trade volume.

This will all depend on your trading style and preference.


SPY Description

  • Fund Inception: 1993
  • Tracks the S&P 500 Index
  • Expense Ratio: 0.09%
  • Number Of Stocks: 506
  • Top 10 Holdings: 28%
  • Yield 1.2%

SPDR S&P 500 ETF Trust (SPY) tracks the Standard & Poor's 500 Index (S&P 500).

SPY was created in 1993, making it the first exchange-traded fund listed in the U.S.  SPY is one of the most popular ETF funds.

It has an expense ratio of 0.09% and offers exposure to over 500 stocks.

The SPDR S&P 500 ETF Trust (SPY) is considered a large blend ETF and tracks a market-cap-weighted index of large and mid-cap stocks.

The S&P Committee selects these stocks.


SPY Performance

Over the last 10 years, SPY has had an average return of 15% annually.  This is almost the same as the performance of the S&P 500 over the same time frame.

The goal of SPY is to mirror the results of the S&P 500 index.

Here is the growth of $10,000 over 10 years with SPY:

SPY Performance Chart


SPY Holdings

The top 10 holdings for SPY make up 28% of its total assets.

These are the top 10 holdings for SPY:

SPY Top 10 Holdings

SPDR S&P 500 ETF Trust (SPY) comprises Apple, Microsoft, Amazon, Google, and Tesla.

However, it also provides exposure to over 500 other stocks.


SPY To SPX Conversion

To convert SPY to SPX, you need ten times more investment to get the same quantity of options.  It's because the trading price of SPX is ten times more than SPY.

The price gap arises even if both options' strike price and expiration date remain the same.

But, the good thing is that the SPY market is more liquid.  So you will not have to wait to convert SPY to SPX.

However, what you need is ten times more investment.


SPX To SPY Conversion

Conversion of SPX to SPY is comparatively easy.  For example, you can get ten SPY options by selling one SPX option.

It's important to note that a higher tax rate applies to the gain made by the SPY option.

Conversion of one SPX to ten SPY is applicable even if both options' strike price and expiration date remain the same.


SPX Options Chain 

The options chain is also referred to as the options matrix.  It contains a listing of all variables related to options.

Generally, these variables include available call options, put options, strike price, volume, pricing information, and related information.

In SPX options, the options chain refers to a listing containing information for the SPX options.


SPX vs SPY Conclusion

There are different ways to execute options trading in the U.S.  Trading via SPX and SPY is one widely used method.

Trading by SPX is dependent on the movement of the S&P 500 index.

The value of this index is calculated by measuring the share price of the 500 largest and publicly traded companies in the United States.

So, if the index aligns with your expectations, you can make a profit and vice versa.

On the contrary, the SPY option depends on the ETF, which comprises investment funds.

It's essential to understand the difference between SPX and SPY to choose one of them as an investment.

To Summarize:

  • SPX Options: are dependent on the index, traded in European style, do not pay a dividend, settled in cash, carry ten times more value than SPY, and liquidity is comparatively low.
  • SPY Options: are dependent on the movement of the ETF, traded in an American style, pay a dividend, settled in shares, carry one-tenth the value compared to SPX, and liquidity is comparatively higher.

Further, SPX carries a tax advantage of 60% of the gain taxed as a capital gain, which is lower than the ordinary tax rate.

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Frequently Asked Questions (FAQ)

How To Trade SPX Options?

Steps To Start Trading In SPX Options:

  1. Open a CBOE Brokerage Account.
  2. Practice With Dummy Transactions.
  3. Set Your Trading Limits Based On Risk Tolerance and Financial Resources.


Is SPX More Liquid Than SPY?

SPX options are significantly less liquid than SPY.  As a result, the value carried by these options is higher, and these options are traded less frequently.

For instance, if the value of SPX options is $100, the SPY value stands around $10.

So, the lower price of SPY leads to higher trade frequency.


What Are The Options In Trading?

Options entitle the owner to sell or purchase the underlying security at a specific price and time.  The owner is not obligated to exercise the option; it's based on their discretion to exercise their right.

So, if the situation favors the trader, they can exercise their right and realize a gain.

On the contrary, if options to exercise are not in their favor, they let it go.  So, the commission paid is lost.