Which is more advantageous? SPX is a 1256 contract and SPY is capital gain correct? Is there any significant difference in skew between the two? Or do they both exhibit skew typical of an "index" option?
they are exactly the same.. just different nominal amounts.. some people say they get better fills in the SPY.. idk.. but accouting for commissions i end up trading in the Spx... the spread is wider but you put on ten flys in the spy.. only 1 in the spx... so who cares about the fills when your paying 10 times the commissions... if your small and position size matters.. you obviously can get more granular with spy..
Profits or losses from both are capital gains or losses but as recently as 2012, it seems to be an open question if options on the SPDR S&P 500 ETF (SPY) are considered Section 1256 contracts and thus eligible for 60/40 LT/ST capital gains and mark-to-market yr-end tax treatment. That seems strange since it's an established, highly liquid product and you'd think there would be a clear IRS ruling on it, but you can Google the topic and find the ongoing debate. Better yet - ask your accountant or your broker how SPY/SPY options are treated at tax time. I don't believe there is any debate on SP, ES, SPX or SPXPM - these products and their options are 1256 contracts.
I believe the 60/40 tax treatment is only available on SPY and other options if your a Broker Dealer/Market Maker, not customer. All cash indexes (and futures) receive that benefit.
There is this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1879583 I had a quick read in the past (ie read the introduction and the conclusions and glanced the graphs lol). They observe a difference in skewness. Fwiw my impression is that their results are not robust but I am far from an expert and haven't read the paper in any depth anyway.
With SPY and ES you have an underlying to trade, scalp your gamma (positive or negative), and hedge your deltas. How exactly do you do that with the SPX as a retail trader? If you don't do any of those things I question whether you are a options trader or just gambling.
i skimmed the paper. I find it hard to believe that there's actually a 10 vol difference between deep in the money calls that are one month out. Either 10 vols is nothing in bid/offer terms or there are significant funding issues that aren't being accounted for (like higher borrow around ex-dividend times) or increased funding from physical settlement/hedging. I couldn't find a mention on borrow costs for the ETF's or accountability for dividends which are lumpy for ETF's and trickle-y for indices. SPX options are the most liquid options in the world and SPY is probably second. 1 vol is a big deal. This would be arbed out in 10 seconds if it were real.
Spoken like a true options trader. SPX options can be economically hedged with the ES. That's what most people do. And around expiry you roll your deltas around to get flat the print.
That is what I was thinking.... you can hedge smaller spx options spreads with spy.... Es is a big contract for just a few spx butterflys.... its an entire complex... vix spx spy es variance swaps.. you would asume any price discrepancies across the space are there for a reason...