Iron Condor: SPX, RUT, etc. or SPY, IWM, etc.

Discussion in 'Options' started by mikemck, Mar 30, 2008.

  1. mikemck


    Should a trader use the big ones: SPX, RUT, etc. or the small ones: SPY, IWM, etc.?

    I understand that the small ones are more liquid with smaller spreads.

    But, it seems like you would have to trade 10 times as many contracts with correspondingly higher commissions.

    Would the liquidity and tighter spreads offset the higher commissions?

    Thanks for any insights and advice.
  2. MTE


    That's something you have to see/try for yourself, depending on what commissions you pay, the size you trade and the kind of fills you can get in index vs ETF options. I say, if you can't get a fill in one, then try the other and see if it works out better.

    Don't forget that it's not just the size that is different. Index options are European while ETF options are American, ETFs pay dividends, and there's is also a difference in settlement procedure.
  3. I prefer the higher commission/tighter spreads with SPY as opposed to trading fewer contracts on SPX with ridiculous bid-ask spreads (It also really depends on how close to ATM you are). If you trade OTM options on SPX, you will have to sit there and play games all day with limit orders on the mid point prices to get a DECENT fill. ATM options probably won't make much of a difference either way - it depends on whether you'd rather give your money to your broker or CBOE.

    Basically, youre almost equally screwed either way. If one had a significant advantage over the other, it would be arbed into oblivion anyway. Also, SPX and similar CBOE products are cash settled, SPY is not.
  4. Whether one is better than the other is subjective and depends on the size of your trades, your brokerage fees, and the specifics of your strategy.

    My own recent study and experience showed RUT to be a good deal compared to IWM ** if you are with a brokerage that charges per-contract fees ** . The bid/ask spreads and strike intervals were equivalent for near month options. For example, a 3-cent spread on IWM options is equivalent to a 30-cent spread on RUT options. All other things being equal, the difference is then the brokerage fees.

    Because it takes 10 IWM contracts to equal one RUT contract, brokerage costs tend to run 10 times as much when trading IWM. The latest trade I did cost $16 to complete with RUT -- it would have cost about $160 with IWM. $16 is irrelevant to my trades, but $160 is a big chunk of the target profit. If you are with a broker that has a flat fee irrespective of the number of contracts, this might not matter to you.

    I also studied SPX vs SPY and NDX vs QQQQ. In both cases the CBOE spreads were substantially larger, unlike RUT. Assume a 3 cent spread on SPY. A round-trip 10-contract trade (at market) will cost $30 in spread loss, plus $20 in brokerage fees at $1/contract. The same market order in SPX will cost $2 in brokerage fees, meaning that the spread can be as large as almost 50 cents and I'll have an equivalent trade. However, SPX option spreads are usually MUCH larger than that, so it is hard for me to think of a spread- or fee-related reason to go with SPX over SPY.

    The mini-versions of RUT, SPX and NDX were all fairly quite large relative to IWM, SPY and QQQQ. If you need to place orders that are smaller than a full RUT contract, then IWM is probably a better deal than RMN.

    The above issues may be specific to the time-period of my study. During another period, SPX may be the better deal (or maybe they'll all be horrible).

    Though SPX tends to have large b/a spreads, it allows for finer tuning of the strategy due to the strike intervals -- finer even than SPY. That kind of precision might outweigh the negative bid/ask spread for some strategies.

    Another consideration is the expiration series. Certain strategies may work better with a month spread that is available in one or the other vehicle, depending on the moment. Like the strike interval, this might also outweigh the issue of brokerage fees or bid/ask spreads for diagonal strategies.

    The last issue worth considering here is assignment. Obviously, RUT, SPX and NDX are European style optons, so you don't have to worry about early exercise/assignment. Of course, if you are doing iron condors, things have got to go really, really wrong before that is likely, anyway, so maybe that doesn't matter, but it is relevant for some other strategies.

    Contrary to some other posts, I actually had good results splitting the bid/ask when entering my RUT orders, but these were for near month, liquid options.
  5. mikemck



    Thank you for your lengthy reply.

    I am new to iron condors. I am just finishing up my second one, both on RUT.

    On the last one I did 20 contracts with OptionsXpress. It cost me $100 in commissions. I seem to be able to get filled
    near the mid-point of the bid/ask spread. I let the options expire so I only had a commission going in. The call and put I sold were $50 from the then current RUT level. The ones I bought were $10 further out. The credit was about $4000.

    It seems like if I did IWM instead, commissions would eat up a big part of the profits.