Just came across a good post from The Options Insider founder Mark Longo about the advantages of using options on the S&P 500 ETF (SPY) instead of the traditional SPX options.
We’ve written about the advantages of ETFs over traditional index options many times before (see our trading rules), but Longo makes a great case for the specific reasons why SPY is a superior choice for most investors. Some people probably don’t know, for instance, that if you want to trade SPX options, you’re limited to one exchange, the CBOE. By contrast, SPY options are licensed for trading on all six options exchanges. Another important difference is that while the SPY options are electronically traded, there’s still a big open-outcry element to the SPX products. Now, we like market makers as much as the next guy (however much that is), but given the choice between a dispassionate, egalitarian server in an air-conditioned room somewhere and a stressed, possibly hungry, probably sweaty market making human on an exchange floor in Chicago, we prefer to route our trades to the former.
Advantages of the SPY options over the SPX options:
- tighter spreads - smaller strikes mean narrower spreads, and penny pricing certainly helps
- faster fills - computers are faster than humans. Deal with it.
- competitive volume - not exactly a comparative advantage, but you’re certainly not disadvantaged from a volume/open interest standpoint these days if you want to trade the ETF options
- better risk management - smaller strikes also mean you can slice and dice your risk with more precision than before, and you don’t have to put on a large position if you just want to hedge an existing position
Lastly, if you have no idea what the graphic above is talking about, see here.