The spreads and liquidity seem to favor the SPY. Why is that given the SPX is much cheaper commission wise? Pros and cons opinions and such appreciated.
Here's why I trade the SPX (usually) and not the SPY. 1) The SPX is 10X bigger. This means trading a far smaller amount of options. Commissions are on a per option basis most of the time, usually with a minimum amount, but once you start trading 50 or more SPY, you should think seriously about the SPX because the commissions are going to be a lot less for 5 SPX. 2) You need to factor in the size difference when you think about bid-ask spreads. Because of the size difference, $0.50 in the SPX is the same as $0.05 in the SPY. Often the SPX quotes with wide spreads, but the "inside" market is pretty similar. After all, you could use one product to hedge the other fairly easily (with one exception outlined below). If you consistently offer close to the midprice on SPX spreads- which I trade fairly often--, I have found that usually you can get filled at 0.10 to 0.15 off the mid, and sometimes less. I have actually been filled at less than the mid once or twice! This corresponds to less than 0.02 difference for SPY, which is not that much different than the quotes you will see. 3) European settlement is much better. The SPX is settled for cash. In other words, if your call or put is in the money according to the SET, then you will be paid in cash for the difference between your strike and the SET times 100 X the amount of options you own (or have sold short--in that case, you obviously owe cash). This is simple and effective and eliminates the need to sell or buy shares at anytime. Also, there is no need to worry about exercise or assignment. It won't happen. In fact, I think all options should work this way. The SPY is potentially messy by comparison. I have carried some monthly SPX options into the SET and thinkorswim frees my margin by about 10:00 CST on Friday morning. Cash for ITM options is deposited Saturday morning and fully available for trading on the next Monday. In the end, it probably makes sense to compare them side by side and see which is the better deal on each possible transaction. I think you'll find the prices are fairly close and that commissions and the European structure tip the deal slightly in favor of SPX most times.
John - A good insight for the SPX. I never trade SPX in large volume, just curious do you see any problem to get a good filled when you try to trade 300-500 contracts ( 2-3 strike prices from ATM) in once ?
300 contracts is a lot of contracts! However, depending on what you are trying to do, large volumes at a good price can be a bit tricky. Have your broker call for a price if you want that many contracts. They'll give you a quote which you can either accept or decline. I do find that with 50 butterflies or condors you may need to feed them into the market over a period of time to get the best fills. The further away from the money you go, the harder it typically becomes. The more complex the order, the trickier it is, as well. Custom orders are usually filled best in separate spreads.
I wonder if they will shift the SPX weeklys to the new C2 exchange? and if it would increase liquidity at all? Is the hybrid system only populated with CBOE quotes? SPY must gain its liquidity advantage from multimarket participants.
SPX will trade on C2 pending some kind of approval that it is going through right now. I regularly trade several hundred contracts on days when I am establishing a position (spreads) which can be very frustrating. Since I have a day job I canât really call up my broker so I end up working the order myself which is extremely time consuming since your orders have to flow through to someone in the pit. I have also found that if I have a standing limit order that has been out there for some time that I have to resubmit the order to get filled because the traders donât always look at older orders. With that said I am really looking forward to SPX going to C2.
A few weeks ago, i try to move my option strategy from RUT (I give up with RUT as too many manipulation now in this animal) to SPX. Initially i try to set up my SPX position with 5 contracts (small position as test run), i get filled almost immediately (< 30 min) with a relative good filled (almost in the mid price). After that I put in another similar position with 95 contracts, and then the fun begin, I initially get partial filled (10 contract) after 10 min and then suddenly the spread widen and move to my unfavorite price (even the SPX underline stay relatively calm). My orders stay there for almost 3-4 hours (even i try to "refresh" by re-submitted them several times just in case the broker fall to sleep and forget about it) but with no luck. End of the day, I give up and closed all my position (15 contracts). Looking forward when SPX go to C2.
I certainly relate...even on single (not spread) orders which supposedly are electronic....as soon as I bid on a contract the bid changes....I think there is someone on the other side...saying "oh boy I got a bite, FISH, on the line. as a retail trader I'm so much happier with the ES options even if they are a bit more pricey.
ES have decent liquidity but the spreads are wide like SPX weeklys. Its my understanding from CBOE that only SPX monthlys will be moving on to C2, not the SPX weeklys.