What do pirates and options traders have in common?

Stepping into the world of options trading might feel akin to how audacious pirates would venture through the Caribbean, braving unknown waters in pursuit of treasure. Like those adventurers of tales of yore, you navigate through uncharted territories, teeming with risk and reward, in search of something enigmatic yet immensely valuable – SPX and SPY options. 

These two forms of treasure, hidden amidst the vast, often tumultuous sea of trading instruments, glitter with a similar allure. To the untrained eye, they might appear as identical pieces of eight, but seasoned treasure hunters know better. Just as two similarly etched pieces of a treasure map hold unique clues, SPX and SPY, though seemingly twins, offer distinct pathways through the labyrinthine world of financial markets.

So where does the real bounty lie? In the shadowy recesses of SPX, or does it lie hidden under the sparkling veneer of SPY? 

This article is your trusty compass, promising to guide you through the intricacies of SPX and SPY options. As we explore together, we’ll chart a course that will not only illuminate the differences between these two options but also help you harness their unique features.

By the end of this journey, you’ll be well-equipped to navigate the financial seas, turning whirlpools of uncertainty into waves of rewarding opportunities.

Strap in, for we’re about to set sail.

Understanding SPY Options

Let’s begin by delving into the essentials of SPY options. Rest assured, it’s no arcane science, yet it holds the potential to captivate anyone with a passion for options trading.

The term SPY denotes the SPDR S&P 500 ETF, an Exchange Traded Fund (ETF) that faithfully tracks the S&P 500 Index. It’s akin to a mirror reflecting the performance of the S&P 500. This ETF is operated by State Street Global Advisors, a firm renowned for managing an enormous volume of assets.

Now, onto the meat of the matter: SPY options. These are financial derivatives that you can purchase or sell, granting you the right, but not the obligation, to trade shares of the SPY ETF. Picture them as an optional backstage pass at a concert—you’re not compelled to go backstage (the underlying shares), but the opportunity exists if you choose to take it.

SPY options have garnered considerable interest because they are American style options, implying you can exercise these options any time before the expiration date. In contrast, European style options can only be exercised upon expiration. Essentially, American style options offer the flexibility to execute a trade when your market insights guide you to do so.

An interesting attribute of SPY options is their contract multiplier of 100. This signifies that one SPY option contract equates to 100 shares of the SPY ETF. Thus, when trading, remember to multiply the price of the option by 100 to comprehend the real value you’re dealing with.

Lastly, we must address liquidity. SPY options are highly liquid due to their widespread use, allowing you to buy and sell them effortlessly without significantly impacting the market price. They’re comparable to a vibrant city market – there’s always a counterpart ready to complete your trade.

In summary, we’ve provided a swift tour of SPY options. It’s more than a simple acronym; it’s an engaging arena for options investors. As we proceed, we’ll explore the other side of the spectrum: SPX. But that, my friends, is a tale for another section. 

What Exactly Are SPX Options?

SPX options, quite simply, are options traded on the S&P 500 Index. The SPX, or the Standard & Poor’s 500 Index, represents the performance of 500 of the largest companies listed on stock exchanges in the United States. Unlike the SPY, SPX isn’t an ETF, but a pure index – a virtual portfolio of stocks, if you will.

The primary allure of SPX options lies in their nature as a derivative instrument tied directly to the S&P 500 Index. When you trade SPX options, you’re not buying or selling rights to an ETF that mimics the S&P 500, but instead, you’re dealing directly with the index. This is quite akin to going straight to the source, like seeking fresh apples from the orchard rather than the supermarket.

Similar to SPY options, SPX options are also American style. This means you have the freedom to exercise these options anytime before the expiration date, offering investors the liberty to make a move when their market analysis suggests it’s the right time.

However, there’s a significant divergence when it comes to the settlement process. While SPY options settle to the underlying SPY ETF shares, SPX options settle to cash. It’s an important distinction, somewhat like choosing a cash prize over a physical gift in a contest—you receive the equivalent value, but in a more flexible form.

One key point of interest about SPY options is their contract multiplier of 100. This means that one SPY option contract represents 100 units of the index. This allows for considerable leverage, and when making trades, it’s essential to keep in mind the real value you’re dealing with—multiply the price of the option by 100 to get a clear picture.

Finally, on the liquidity front, while SPX options may not be as liquid as their SPY counterparts due to the larger contract size, they are still widely traded and boast sufficient liquidity for most investors. In essence, SPX options might be likened to a more exclusive, but still quite active trading club.

Now let’s delve into the nuances that differentiate SPX from SPY. 

Comparing the Differences: SPX vs. SPY

As we move along in our exploration of SPX and SPY options, it’s time to put these two trading giants head-to-head. To offer a clear picture, let’s break it down into five key areas: Paying Dividends, Expiration and Settlement, Exercise Style, Value, and Liquidity. Let’s get into the nitty-gritty. 

A side-by-side comparison image showcasing the basics of SPX and SPY options, highlighting their key differences for options traders

The image above is a concise visual comparison highlighting the key aspects of SPX and SPY. We dive into the specifics below.

Paying Dividends

First up, dividends. While this might seem irrelevant for options trading, it actually has a significant impact. SPY, being an ETF, holds the underlying stocks of the S&P 500 and pays dividends accordingly. This can sometimes cause the price of SPY to drop by the dividend amount on the ex-dividend date. Conversely, SPX, being an index, pays no dividends. This distinction can result in different pricing dynamics for SPY and SPX options. 

Expiration and Settlement

Next, we dive into expiration and settlement. Both SPX and SPY options are available in various expiration cycles, from weekly to monthly and quarterly. However, the main difference is in how they settle. SPY options are physically settled, meaning you’ll receive shares of the underlying ETF. SPX options, on the other hand, are cash-settled, which means you’ll receive (or owe) the cash equivalent of the in-the-money amount at expiration. 

Exercise Style

On the matter of exercise style, both SPX and SPY options are American style, which means you can exercise them anytime before expiration. This provides greater flexibility for investors, allowing them to capitalize on price movements before the option expires. 


In terms of value, an SPX option is approximately ten times the value of an SPY option (as SPX represents 10 times the value of the S&P 500 index compared to SPY). This makes SPX options a choice for investors who want to make larger trades and who can handle more significant swings in value. 


Finally, let’s talk about liquidity. SPY options are one of the most actively traded options in the world, making them incredibly liquid. On the other hand, SPX options, despite being less liquid than SPY options due to their larger contract size, still boast a substantial trading volume and sufficient liquidity for most institutional investors. 

Tax Advantages of SPX over SPY

The unique structure of SPX options provides them with certain tax advantages compared to SPY options. But how does a cash-settled option like SPX connect to tax benefits? Let’s peel back the layers.

Under U.S. tax code, SPX options are recognized as Section 1256 contracts. This classification yields a favorable tax treatment—known as the 60/40 rule—where gains or losses are considered as 60% long-term and 40% short-term, irrespective of the actual holding period. This blended rate can result in less tax owed compared to the potential short-term capital gains taxes incurred from SPY options, especially if held for less than a year.

On the other hand, if you’re trading SPY options, profits held for less than a year fall under short-term capital gains taxes, which can be higher depending on your tax bracket. Profits from positions held for more than a year are subject to long-term capital gains taxes.

However, keep in mind that the world of taxes is labyrinthine and varies based on individual circumstances and jurisdictions. The details above pertain to U.S. tax laws and taxpayers. So, do make it a point to consult a tax advisor or CPA to get a comprehensive understanding of the tax implications of your trading activities.

Notional Value and Flexibility in SPX and Spy Options

As we continue our exploration of SPX and SPY options, we now turn our attention to two key factors: notional value and flexibility. Much like the intricate workings of a finely tuned watch, each component of options trading has its role in ensuring everything works seamlessly. Let’s get into the specifics of notional value and flexibility and how they differentiate SPX and SPY.

Notional Value

The notional value is the total value of a leveraged position’s assets. This concept plays a critical role in options trading as it allows you to control a large amount of shares with a relatively small investment. In the world of SPX and SPY options, this is where we see a clear distinction.

One SPX option contract represents 10 times the value of the S&P 500 index, whereas one SPY option contract equates to one-tenth of the S&P 500 index. This means that the notional value of an SPX option is approximately ten times that of a comparable SPY option. For large institutional investors or individuals seeking significant market exposure, the larger notional value of SPX options could offer a distinct advantage.


Next, let’s tackle flexibility. Both SPX and SPY options are American style, meaning they can be exercised at any point up to expiration. This grants investors the freedom to respond to market movements in real-time, rather than being constrained to the option’s expiration date.

However, a key difference lies in the settlement process. SPY options settle into the underlying ETF shares, allowing investors to potentially transition into a stock position if they choose. On the flip side, SPX options are cash-settled. While you don’t have the opportunity to transition into a stock position, the cash settlement does offer its own form of flexibility. It bypasses the need to manage a large position in the underlying stocks, particularly beneficial for those focusing solely on options trading.

In the end, the choice between SPX and SPY options depends on your specific needs as an options investor. Whether you value larger notional value and cash settlement flexibility of SPX, or the ETF share settlement and smaller contract size of SPY, both offer unique benefits in the expansive realm of options trading.

Weighting the Pros and Cons of SPX and SPY Options

SPX Options: Pros and Cons

SPX options bring a fair share of benefits to the table. First off, they hold a higher notional value, appealing to investors looking for a larger market exposure. Their tax advantage, courtesy of their status as Section 1256 contracts, is another lure for investors keeping an eye on the tax implications of their trades.

However, a few things might make you pause. The larger contract size, while advantageous for some, might be off-putting for those looking for a smaller investment or more precise control. Additionally, trading costs can potentially be higher due to wider bid-ask spreads, as SPX options are less liquid than SPY options. And let’s not forget the margin requirements – SPX options typically require higher margins due to their larger size, which might tie up more capital.

SPY Options: Pros and Cons

On the flip side, SPY options shine in their own right. The smaller contract size offers a lower entry point, making them more accessible to individual investors. Their liquidity is remarkable, ensuring smoother trading with tighter bid-ask spreads, which can translate to lower trading costs. Additionally, their physical settlement offers the flexibility to transition into an ETF position if desired.

That said, SPY options come with their own set of drawbacks. Tax treatment isn’t as favorable as that of SPX options, especially for short-term trades. Margin requirements, while generally lower than SPX options, can still be a consideration depending on the size of your positions and trading account. 


In the realm of options trading, SPX and SPY options offer distinct features and opportunities. Understanding these complex instruments commands a good understanding of financial derivatives and their nuances, which we aimed to explore in this article. 

These two financial derivatives, both tied to the S&P 500 Index, reveal how different structures, contract sizes, liquidity levels, and even tax treatments can create distinct experiences for options investors. We explored their characteristics, from the very essence of what SPY and SPX options are, to the comparison of their key attributes. We delved into their distinctive tax implications, the notional value, flexibility, and ultimately, weighed their pros and cons.

SPX and SPY options offer distinct advantages. SPX options, with their larger notional value and cash-settled nature, may be more appealing to institutional investors or those seeking significant market exposure. They also provide the bonus of tax benefits due to their status as Section 1256 contracts.

On the other hand, SPY options, with their smaller contract size and stock-settled nature, might be more fitting for individual investors or those seeking a lower entry point. Their remarkable liquidity ensures smooth trades and potentially lower trading costs. 

And for investors who value staying informed with ease and receiving timely insights, using options alerts can provide valuable assistance. Especially those that have other responsibilities like a family, and or a full-time job but they’re still interested in dipping their toes in the market.


How Can SPX Be Translated to SPY?

To translate SPX to SPY, you essentially divide by 10. This is because the SPX, representing the S&P 500 Index, is approximately 10 times the value of the SPY, which is an ETF tracking the S&P 500. So, for example, if SPX is trading at 4,300, the equivalent SPY price would be around 430.

Can You Exercise SPX Options?

Yes, you can exercise SPX options. They are American style options, which means you can exercise them at any point up to their expiration date. However, it’s important to remember that SPX options are cash-settled, meaning you will receive the cash equivalent of the in-the-money amount rather than shares of an underlying asset. 

Which is Preferable for Trading, SPX or SPY? 

Whether it’s better to trade SPX or SPY depends on your personal trading strategy and financial objectives. SPX options, with their larger contract size and more favorable tax treatment, may be better suited for institutional investors or those seeking significant market exposure. On the other hand, SPY options, with their smaller contract size, excellent liquidity, and physical settlement, might be more appropriate for individual investors or those seeking a lower entry point. 

Does SPX Move the Same as SPY?

SPX and SPY generally move in the same direction because they both track the S&P 500 index. However, there may be small discrepancies due to factors like the dividend payments made by SPY (as it holds the underlying stocks of the S&P 500) and the slightly different ways in which the two are priced. 

What is the Reason for SPY’s Lower Value Compared to SPX?

SPY is priced lower than SPX because it’s an ETF designed to track the S&P 500 at 1/10th of its price. So, if the S&P 500 index (represented by SPX) is trading at 4500, SPY would typically be trading around 450. This makes SPY more accessible to individual investors who might not have the capital to trade larger SPX contracts.