How Liquid are SPY options, and options in general in comparison to securities?

I respectfully disagree; the spreads are better on SPY. Whether that's better for you or not depends on number of contracts and commission rates.

 

Are tax treatments the same for SPY and SPX?

 

I can almost always trade SPX a nickle off the mid with a limit order, so the spread is irrelevant. Are you talking market orders?

 

No, limit. I guess I usually trade in the money, though. So I stand corrected.

 

No.

 

I noticed that for the options I traded, ITM options had higher IV than ATM or OTM. And the deeper ITM, the higher the IV but the smaller the extrinsic premium. Which is more important, IV or extrinsic premium?

Let me explain: When I traded ITM options, I tended to go long (shorts when I wanted to close out my overall positions for that underlying).

Thanks.

 

SPY is not considered trading index but trading equity?

 

It all comes down to whether the trade can be hedged easily by the other party/MM.

MM's think like this:

100k is about 600 ATM options with 30 days till maturity. Or 300 straddles. Or 2000 options about 1 sd out with 20 delta.

So, can that be hedged? 600 ATM calls is 30.000 stocks/delta's in SPY... or about 6.8 mln worth of S&P500... so that's 60 ES-futures. Delta hedge is done in a second.... easy...
Vega/gamma risk..., if the price is right you will be able to manage that pretty easily.

So short answer... yes, 100k in SPY is very doable. But it does depend on where you trade it, how far OTM or how far out regarding maturity....

As a MM i've traded far bigger and less liquid... I remember one trade in a Telco where the other party wanted to trade spread, but both legs separately on the non-liquid exchange... basically we hit on of the legs worth 2mln about 15 mins before close and waited for the other leg to come to us, letting the other guy sweat a bit...
A bit of risk for us as well, but calculated.

 

The big tax difference in US tax policy is that SPX is taxed like a Futures trade --- 60% long term gain and 40% short term gain even if you are in the trade for one minute. So, if you are successful in trading your ideas, SPX is by far the best route

 

Thanks for the explanation. Make it easier to understand and do quick calculations. I have 2 questions:

1. What if the bid/ask offers are less than what you want to trade, e.g., at 1 sd, if there are only 10-100 offers but you want 2000? I assume MM would take the trade by adjusting the bid/ask to make it worthwhile for them. How do they determine if it is worthwhile?

2.

Can you explain this for me?

Thank you.