For those that trade index options, You probably know that SPX options can have a lot of slippage, but can be executed for large size. Let's say a fund wants to enter a put spread in the SPX front month options for large size, would it get a better fill using ES futures options or SPX options? My question is this: for large options orders, what are the plus and minuses of using SPX options versus ES options? And for weekly options, does it make a difference versus monthly options at the CBOE trading SPX? Thanks in advance.
I think for "large" spread orders on either SPX or ES, using a broker to "shop" you order will help find liquidity. It is often worth the extra commissions when the listed markets are wide. Bob
Spreads in the SPX are usually very tight, depending on the type of spread. A front month vertical would generally be quoted size up about .10 around fair value and could probably be traded for as little as .05 around fair value. Other spreads could be much wider, such as a long dated time spread. The problem is knowing the "real" market. The way the SPX is quoted, the quoted markets are very wide, while the "inside" markets are usually very tight. As rmorse mentioned the larger players will generally us a broker to quote a spread. The SPX weeklies and monthlies (as opposed to the standard expirations) are quoted a bit differently. They have multiple firms sending electronic quotes into the system, so the markets you see on the screen are much tighter. The actual markets are probably about the same. If you see a bid or offer on a weekly SPX option, you can hit or take it immediately. Not so with the monthlies as the order may be held by a broker and it is a bit more time consuming to try and do the trade.
Why deal with all the spread and hidden market nonsense with SPX options? Just trade ES FOPs if the somewhat smaller size and American style (who would actually exercise one of these anyway?) aren't a concern.
There are plenty of traders that exercise ES FOPs. ES is physical delivery settled, so you have to buy/sell the ES futures at the particular strike if you are in the money. The problem occurs when the price is in between the two strikes of the vertical put spread, or is at the strike of one side of the puts bought or sold where you have to hedge out, change strikes, or exit the position to get flat at the close of options expiration day. With SPX options, there is none of these problems because it is cash settled. I was just wondering if the downside of having more slippage on large sized orders in SPX options vs. ES options is worth the convenience of cash settlement. Apparently those on this board don't have much experience with this issue.
What is FOPs? Is that a request for quote? The CBOE has a complex order book. I don't think the CME has one.
I use both, weeklies SPX and /ES options. SPX monthlies has more wide spreads than weeklies. 10 points between strikes is $100 in SPX and $50 in /ES so I prefer SPX weeklies because it has less broker fees (2 contracts /ES = 1 contact SPX)
FOPs aka Futures OPtions. CME direct provides access to the RFQ "book". I don't know if there is a formal name for it.
Even though this doesn't address the original question. I use the different option chains for different things. By default I trade SPX options as I really like the European style pricing and the liquidity, and for complex positions (multi legged spreads) the price increment is usually in the 0.05 level. ES options (fops), are very convenient when I want to do some Naked leg, like a Risk Reversal for instance. Because the option settles into the futures themselves then position margin is the margin for a single future contract, as opposed to whatever is the RegT formula for naked puts or calls in SPX. This alone makes the ES fops very appealing for those strategies. The draw back is that complex spreads in ES fops are usually priced in 0.25 increments which I always find puzzling.
I'm surprised no one has mentioned this yet. Not only is SPX more liquid at larger sizes, but the tick increments are .10 in spreads above 5.00, as opposed to .25 in ES.