SPX vs. SPY: In-Depth Comparison

Options trading can feel pretty intimidating for newcomers. This type of trading has its own language that can make it super challenging for beginners to figure out exactly what people are even talking about – what on earth is the “ex-dividend day” and why, precisely, do I need to care about it?

While trading options can get complicated, the core concept is not the “option” to buy or sell an asset at a predetermined price. This simple and powerful tool can be part of a balanced investment strategy, particularly when the markets are volatile or entering bear territory. 🐻

In this article, we are going to focus specifically on SPX and SPY options, two of the most popular options to trade on the S&P 500, an important index fund that many investors use as a shorthand for the overall stock market.

Although the index has had a tough year – losing 18.4% of its value year to date – experts disagree on whether the S&P 500 has further to fall or can only go up from here. Luckily for us, options trading allows us to make investments for either outcome AND can help us cap our losses if our predictions go awry.

Join us, as we answer the important questions that every options trader needs to know, from the basics of options trading to whether SPX or SPY options make more sense for your unique investment context.

What you’ll learn

• A Refresher on Options Trading
• What is SPY?
• What Are SPX Options?
• Key Differences Between SPY vs. SPX
• Cash-Settled vs. Stock
• Flexibility & Notional Value
• Conclusion
• FAQs

First: A Refresher on Options Trading 👨‍🏫

Options are contracts that allow an investor the right to buy or sell a security within certain parameters, stipulating a set price that the asset can be purchased or sold for, known as the “strike price”. Options contracts are also time-limited and come with a predetermined end date, typically called the expiration date.

An options contract allows the investor the opportunity to “exercise” or fulfill the contract, but does not require them to do so. As investors, we benefit because options contracts allow us to buy or sell securities without the risk of price changes. More importantly, the optional nature of these contracts allows us to cap our potential losses, since we can always let an options contract expire if the terms are no longer profitable for us. 

Depending on the type of option selected, investors can either buy or sell shares of an underlying asset. If we are interested in buying shares at a certain price, we would look for a call option. If we are interested in selling shares at a certain price, we would look for put options.

There are many different reasons why an investor might choose to trade options. Options trading can help investors hedge their portfolios against losses, generate income, or simply speculate on price changes in the market.

What is SPY? 🤔

Developed in 1993, SPY is the acronym for the SPDR S&P 500 ETF Trust – widely considered to be the first exchange-traded fund (ETF) ever created. An ETF is a portfolio of stocks, bonds, and other securities that is designed to track a specific index, commodity, or sector of the economy. In the case of SPY, the ETF is designed to track the Standard & Poor’s 500 (S&P 500), an index containing the 500 largest publicly-traded companies in the U.S.

Many investors chose to invest in SPY or similar ETFs because they can own shares in all of the companies included in the S&P 500, at a fraction of the cost that they would have to pay if they purchased the stocks individually. Moreover, the S&P 500 itself is considered to be an important barometer for the overall health of the stock market and can be particularly attractive for investors.

The S&P 500 includes companies from many different sectors of the economy, with approximately 75% of the fund’s holdings representing information technology companies, healthcare, consumer discretionary spending, financial firms, and communications companies. The fund includes many companies who are household names, like Apple, Amazon, Tesla, Meta (Facebook), and Alphabet (Google).

What Are SPY Options? 📃

While many investors choose to invest directly in SPY by purchasing shares of the fund, some investors choose to engage in SPY options trading – meaning that they enter into contracts to buy or sell shares of SPY for a certain price or strike point, before the contract’s expiration date.

For a call option, let’s imagine that we have purchased an SPY options contract with a strike price of $250 and an expiration date 30 days in the future. After two weeks, SPY prices have risen to $300 per share and we decide to exercise our call option. We use our contract to purchase 100 SPY shares at $250 each.

At this point, we can choose to either hold the shares in our portfolio or we can choose to sell them on the open market for $300 apiece, netting ourselves $50 in profit per share minus any commission and trading fees.

A put option functions the same way, albeit in reverse. Imagine that we’ve purchased an SPY put option with the same strike price of $250 and it expires in 30 days. If the stock market starts to dip during that time period and SPY shares are trading at $200 per share, we can exercise our contract and sell our shares at $250 – profiting from the difference in price between our options contract and the market price we pay for the shares to fulfill the contract.

What Are SPX Options? 🧐

While SPY is an ETF that is backed by actual shares of stock in the companies that are listed on the S&P 500, the SPX is a theoretical index driven by the price of the S&P 500 itself. This means that it is not possible to buy directly into SPX, since there are no shares that could be bought and sold.

However, investors can choose to buy and sell SPX options, which function as bets on whether the price of the index will increase or decrease.

SPX options can be bought and sold on the open market, although typically investors will need to have an account with a brokerage that specializes in options trading. SPX options are available in multiple sizes and with daily, weekly, or monthly expiration dates.

Key Differences Between SPY vs. SPX ⚔

For starters, SPY and SPX are fundamentally different kinds of financial products – SPY is an exchange-traded fund (ETF), while SPX is a theoretical index. That said, many investors tend to talk about SPY and SPX options somewhat interchangeably, so it can be extremely helpful to understand the differences between the two.

SPY options are “American-style” which means that they can be exercised at any point ahead of the expiration date. If the market conditions make our position profitable or “in-the-money” an hour after we purchase our options contract, we have every right to go ahead and exercise the contract.

In contrast, SPX options are “European-style” which means that they can only be exercised on their expiration date. While this is a constraint on the investor, it does provide us with more time in which to make our trading decisions, since we are unable to exercise our options whenever market conditions feel right. This might be particularly appealing for individual investors, who may have limited time or tolerance to follow volatile markets on a daily basis.

As a general rule, most options contracts are American-style, particularly those involving equities, ETFs, or commodities. On the other hand, most European-style options contracts tend to involve indexes – SPX for the S&P 500 or other indexes like the Nasdaq 100 or Russell 2000.

Paying Dividends 💵

One of the particularly unique features of SPY options is that investors have the potential to earn dividends, a rarity in the options world. SPY is an ETF with a portfolio made up of stocks offering dividends, so SPY options are able to pass along those dividends to fundholders.

In contrast, the SPX is only a theoretical index and is not backed up by any assets or stock shares. As a result, SPX options are unable to offer dividends to their investors. For interested investors, the chance to earn dividends might make SPY options more appealing than SPX.

To earn dividends, SPY options traders have to exercise their options ahead of the “ex-dividend day,” an industry-established cut-off date for dividend eligibility. Typically, ex-dividend days fall on the third Friday of the month in March, June, September, and December and this date typically corresponds with the expiration date of many SPY trading options contracts.

For SPY options traders who are “in-the-money” – meaning that they hold an options contract that is profitable based on current market pricing – many choose to exercise their options contract ahead of ex-dividend days, so that they can receive dividends. After all, miss that deadline and the earned dividends go to whomever held those shares of stock on that day.

As a result, SPY options traders should pay close attention to prices around ex-dividend days, since trading volume and price volatility are likely to be higher than during other periods.

Expiration & Settlement Dates 📆

How and when SPX and SPY options expire is an important detail that potential investors should pay attention to, since different types of options close in significantly different ways. SPY options expire at the close of business on their expiration date, typically falling on a Friday. It is not uncommon for traders to refer to this date as “expiration Friday.”

On the Friday of expiration, SPY traders have until the close of business to either “close” their position or let it expire. If our options contract is in-the-money, we would choose to exercise our options contract and close our position. However, if market conditions are unfavorable, we might choose to simply let our contract expire. After the expiration date has passed, SPY options no longer have any value.

SPX options are slightly more complicated. If an SPX options contract expires on the third Friday of the month, trading for those options must cease the day before, on the third Thursday. The opening price of the S&P 500 on Friday determines the settlement price that we will receive for our options. However, there are other SPX options that expire on other, non-third Fridays, and these act just like SPY options, expiring at the close of business.

Since SPX options are European-style, they are only able to be exercised on the day of their expiration. This means that investors holding SPX options contracts must decide on their expiration day whether they would like to exercise their contract or let the contract expire.

Taxes 💰

SPX and SPY options are also distinct in the tax implications that come with each product. Under current Internal Revenue Service (IRS) regulations, SPX trades are tax-advantaged, meaning that 60% of SPX gains are taxed at the lower rate enjoyed by long-term capital gains and the remaining 40% is taxed at the higher, short-term capital gains rate.

In contrast, all SPY trading is taxed at the (higher) short-term capital gains rate. This means that SPY traders will owe more on their tax bill for the same amount of gains than SPX traders will. While we all have our own unique tax circumstances, aspiring options traders should talk to a tax professional to make sure that they don’t get hit with an unexpected tax bill at the end of the year.

Cash-Settled vs. Stock ⚖

One of the largest differences between SPY and SPX options is how these contracts are settled. The SPX is a theoretical index, meaning that its value is not based on a held portfolio of stock shares, but is instead pegged to the value of the S&P 500. This means that SPX options contracts are settled in cash on the expiration date – there simply aren’t any shares of stock available to trade hands.

In contrast, the SPY is an ETF that is backed up by an underlying portfolio of stock representing the companies listed on the S&P 500. As a result, SPY options contracts are settled in shares – typically delivered to investors’ accounts on the day after they’ve exercised their options.

This distinction is crucial for investors to keep in mind. If we are more interested in accruing cash from our options trading, SPX options might be a better fit. Investors may also consider what sort of market cycle they find themselves in, since the dollar may be stronger than the equity market, further incentivizing SPX.

If we are more interested in building and holding a portfolio of stock, SPY options might be a better choice. This decision is particularly important during times of market volatility – is cash the more stable asset or does it make more sense to expand our stock portfolio while the market is down and stocks are relatively cheap?

Investors should be aware that these two options don’t carry the same level of inherent risk. Once SPX options are settled as cash, the investment ceases to bear risk. But, an SPY settlement in shares continues to carry risk for as long as we hold those shares, since the stocks could change in value after they come into our possession.

Flexibility & Notional Value 📜

For investors who are looking for an extremely flexible investment, SPY options can be an attractive offering. Because SPY options are American-style, investors are able to exercise their options whenever they choose – providing ultimate flexibility.

SPX options contracts are European-style, meaning that investors are unable to exercise their options until the expiration date. While this might be a problem for some investors, we should keep in mind that some SPX traders simply sell their options contracts ahead of the expiration date – holding a European-style options contract doesn’t mean that we have to hold it until the expiration date, just that we can’t exercise the contract until then.

Investors should also keep in mind that SPX and SPY have inherently different values – the SPY is intended to be 10% of the price of the S&P 500, and thus should be one-tenth the price of SPX. With all other factors being held equal (strike price, expiration date) SPX options should be worth ten times the value of SPY options.

Liquidity 🌊

In terms of liquidity, both SPX and SPY options are extremely liquid assets, with both products regularly experiencing high trading volumes. But, SPY options are the more liquid out of the two.

SPY’s superior liquidity is because the options are available for a lower price and typically carry lower commission fees. This means that there is a larger pool of investors who are willing to buy or sell these options. In contrast, SPX options have a higher price point that requires more capital – and thus, has a smaller pool of investors who are interested in these options contracts. 

Despite this distinction, both SPX and SPY options are both considered to be extremely liquid, which might bring comfort to newer options traders who are worried about committing to an asset that they might be unable to resell. For context, the SPY currently averages more than 100 million shares traded daily, so finding another buyer shouldn’t be a challenge.

Values 📈

Aspiring options traders should keep in mind that SPY and SPX options contracts typically offer investors the right to buy or sell 100 shares per contract. This can translate into a huge amount of money – far more than some investors may have in their brokerage accounts.

As a result, some brokerages allow investors to purchase SPY and SPX options on margin, meaning that investors borrow funds to purchase these contracts, while keeping a small percentage of the total value in their account as collateral. 

For example, imagine that the SPX closed at 2,750 points and we wanted to exercise our in-the-money call option. We would have the right to purchase $275,000 worth of the underlying asset – cash in this instance, since the SPX is a theoretical index. The cost of our options contract (strike price multiplied by 100 shares minus any commissions or fees) would be deducted from the total $275,000 and the remainder would be deposited into our account as cash.

If we held an SPY option for the same strike price and expiration date, we would be eligible to purchase $27,500 of the underlying asset – since SPY is worth 10% of SPX. Importantly, because the SPY is an ETF that is backed-up by physical shares of stock, our profit would be delivered as stock shares, not cash.

Conclusion: Is SPY or SPX Better for You? 🏁

Whether SPY or SPX options are the better choice is inherently based on our own individual investing preferences. For investors with smaller amounts of capital to invest, the higher entry point of SPX options may be a deal breaker.

Some investors may be drawn to SPY’s potential for dividends or the desire to hold an extremely liquid asset. In contrast, investors who are worried about their tax bill or appreciate the ease of options settled in cash may find SPX more attractive.

Regardless of whether we choose to invest in SPY or SPX options, the primary question that we need to ask ourselves is whether we are comfortable with the level of risk that we are taking on. Options trading can be risky – particularly if investors are trading on margin, which amplifies potential gains and losses. 

Investors should remember that SPY options have additional risk because they are settled in shares – the value of those shares will continue to fluctuate after they enter our portfolio, potentially eroding our previously-earned gains.

Beginning options traders might try looking for an online brokerage that allows them to practice options trading without investing any real money. Most reputable stock brokerages for new investors do have this feature, but it’s important for traders to do their research before joining a broker.These tools can be extremely helpful to learn how to trade options and what pieces of information to look for – without risking your hard-earned assets as you move up the learning curve.

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8.0/10 Visit Stash on Stash's website

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Fees

Account minimum

$0

Starts at $3*

$500

Minimum initial deposit

$0

$0

$0

Commissions

$0

$0

$0

General

Best for

DIY stock trading

New investors

Beginners and mutual fund investors

Highlight

Pioneer of commission-free stock trading

Value-based investing

Low fees

Promotion

Free stock

$5 bonus¹

Rating

8.0/10 Visit Robinhood on Robinhood's website

8.0/10 Visit Stash on Stash's website

9.5/10 Visit Firstrade on Firstrade's website

About the author

Tim Fries

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Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.