Arb with XSP and SPY options?

XSP and SPY both derive their value from the SPX index (both are 1/10 of the SPX).
Anybody studied the options of these 3 for any arbitrage etc?
I'm monitoring for only a few days these 3 tickers, and if the data (the option chain tables) is correct, then it seems arb is possible. Any confirmation or comment?

 

By arbitrage I mean to save on Premium by simply taking the cheapest of the two (XSP or SPY for the same strike and ExpDate).
Ie. even using mixed by taking 1 leg from the one and the other leg from the other.
Example for a LongStraddle (ie. LongCall + LongPut, both using same Strike and ExpDate)
by using snapshot API data from TD Ameritrade. MP is theoretical MidPrice and is calculated from Bid and Ask:

Code:

Ticker=SPY
ExpDate=2023-07-21-Fr
Strike=440
AsOf=2023-06-16-Fr-1551xx-EDT DTE=35.00  US=439.7400
Call:  L=7.21   B=7.24   A=7.26   IV=11.44   MP=7.2500   BS=240  AS=279  V=25825 OI=34782
Put:   L=5.53   B=5.53   A=5.54   IV=11.44   MP=5.5350   BS=240  AS=14   V=21669 OI=15631
Cost_of_Straddle: Call.MP + Put.MP = 7.2500 + 5.5350 = 12.7850

Ticker=XSP
ExpDate=2023-07-21-Fr
Strike=440
AsOf=2023-06-16-Fr-1551xx-EDT DTE=35.00  US=441.4900
Call:  L=9.61   B=7.81   A=8.35   IV=11.62   MP=8.0800   BS=10   AS=10   V=19    OI=600
Put:   L=4.85   B=4.85   A=4.89   IV=11.62   MP=4.8700   BS=64   AS=64   V=35    OI=30
Cost_of_Straddle: Call.MP + Put.MP = 8.0800 + 4.8700 = 12.9500

Cheapest cost when MIXED from both:
SPY.Call + XSP.Put = 7.2500 + 4.8700 = 12.12
Premium saved (%) against SPY = (12.7850 - 12.12) / 12.7850 * 100 = 5.20%
Premium saved (%) against XSP = (12.9500 - 12.12) / 12.9500 * 100 = 6.41%

 

Is the risk in assignment? Spy option will be assigned with stock while xsp will be assigned with cash?

 

There is a price difference between XSP and SPY, and that difference is priced in as ~$0.75
XSP.Call.MP - SPY.Call.MP = 8.0800 - 7.2500 = 0.83
SPY.Put.MP - XSP.Put.MP = 5.5350 - 4.8700 = 0.665.

Arb opportunity vanishes if you account for that difference in your calculations:
12.12 + 0.75 = 12.87, which is between 12.7850 and 12.9500.

In other words, you get it cheap because it is not a straddle but the equivalent of 1.75(=441.4900-439.7400) wide strangle.

 

the difference is due to Divident?

 

I guess

 

I have not yet analyzed the specific example in the original post.

But I think all three comments are relevant.

With SPY there is pin risk, and with that comes the risk of assignment.

SPY has a dividend, which can trigger an early assignment.

if you get assigned on a short leg, then not only do you have to pay the dividend, but you have a short stock borrow fee, and the cost of capital that is tied up to satisfy the margin requirement for short stock.

Finally, SPX is an index, while SPY is an ETF, so there is always the potential for a small difference in the actual value, i.e., tracking error. And while in theory the value of XSP should be exactly one tenth of the value of SPX, in reality it is not, because the final digit has to be rounded up or down, and that can have an impact on the outcome at settlement.

If there are genuine arbitrage opportunities between the three classes of options, I suspect they are quickly identified by high-powered algos, and thus evaporate very fast.

 

I think doing similar calc(s) for LongStrangle (instead of LongStraddle) could find combinations with a clear advantage, IMO.
Of course these are examples for LongStaddle and LongStrangle, but other lucrative combinations are possible too (single-leg and multi-leg constructs).