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John J. Hardy
Chief Macro Strategist
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Trading the S&P500: what options products are available
Koen Hoorelbeke
Investment and Options Strategist
Summary: Explore the diverse range of products to trade the S&P 500, understand their nuances, and make informed decisions tailored to your capital, strategy, and risk tolerance.
Trading the S&P 500: different option products
Introduction to the S&P 500
The S&P 500, also known as the Standard & Poor's 500, is one of the most widely followed equity indices in the world. Representing the stock performance of 500 large companies listed on U.S. stock exchanges, the S&P 500 serves as a key indicator of the health of the U.S. stock market and the broader economy.
It's important to note that the S&P 500 index itself is not directly tradable. An index is essentially a calculation, representing a snapshot of the market it covers, and thus, there's nothing tangible to deliver. This is why derivatives like options exist, allowing traders and investors to gain exposure and trade indirectly based on the performance of the S&P 500 index.
Guiding questions for choosing the right S&P 500 product
Before diving into the specifics of each product, consider these guiding questions to determine which S&P 500 product best aligns with your trading goals and resources:
- What is your available capital?
- Different products have varying contract sizes, which can align better or worse with your capital.
- How important is liquidity to you?
- Tight bid-ask spreads and the ability to easily enter or exit positions can be crucial for frequent trading.
- Are you comfortable with the risk of early assignment?
- European style options, like SPX and XSP, eliminate this risk, while American style options, like SPY, carry it.
- How significant are margin requirements in your trading plan?
- Some strategies and products require more capital than others. Defined risk strategies tend to require less margin than undefined risk strategies.
- Do you trade during non-standard hours?
- Some products offer extended trading hours, beneficial for certain strategies or international traders.
Comparative analysis of S&P 500 products
1. SPX options:
- Ticker:
spx:xcbf - Contract size:
100 * index - Pros:
- Direct exposure to the index.
- European style, eliminating early assignment risk.
- Suitable for larger portfolios due to its size.
- Cash settlement simplifies the expiration process.
- Divers expiry options including weekly/daily expirations. - Cons:
- Higher capital requirement.
- Might be too large for retail traders.
- No dividends
2. XSP options:
- Ticker:
xsp:xcbf - Contract size:
10 * index - Pros:
- Offers a smaller contract size, more accessible for retail investors.
- European style, eliminating early assignment risk.
- Cash settlement simplifies the expiration process.
- Diverse expiry options including weekly/daily expirations. - Cons:
- Less liquidity compared to SPX.
- No dividends
3. SPY options:
- Ticker:
spy:xcbf - Contract size:
100 * spy (spy is approx. equal to xsp-index) - Pros:
- Extremely liquid, very tight bid-ask spreads
- American style allows for more strategy flexibility.
- Aligns closely with the index's performance.
- Deliverable (meaning you can buy and own them) - Cons:
- Early assignment risk due to American style.
4. ES (S&P 500 futures options):
- Ticker:
esw3:xcme - Contract size:
50 * index - Pros:
- Offers leverage.
- Aligns closely with the index.
- American style. - Cons:
- Higher capital requirement.
- Early assignment risk.
5. MES (S&P 500 micro futures options):
- Ticker:
mes:xcme - Contract size:
5 * index - Pros:
- Smallest contract size, accessible for all levels of traders. - Cons:
- Less liquidity than its larger counterparts.
Using the above information we can have a look at a few scenarios in which a fictional character makes a choice on how he/she will trade the S&P500 index.
Scenario 1:
Mike is an experienced trader with a capital of $25,000. He has a keen interest in trading volatility on the S&P 500 and prefers using advanced strategies like iron condors and broken wing butterflies. Here's how he might approach his decision:
Determine Exposure and Risk Tolerance:
With his capital, Mike has to be cautious about the products he chooses. Trading SPX directly might be capital-intensive, especially with complex and/or undefined strategies
Selecting the Product:
Given his capital and preference for advanced strategies, Mike might lean towards XSP or SPY. Both products offer a smaller contract size, aligning better with his account size. XSP might also be the better choice if Mike will trade strategies that might have legs In-The-Money, which are susceptable to early assignments.
Scenario 2:
Jane is a trader with a capital of $100,000. She believes that the S&P 500 will decline in the next month and wants to make a bearish trade. Here's how she might approach her decision:
Determine Exposure and Risk Tolerance:
With her capital, Jane can afford to trade any of the S&P 500 products. However, she must decide how much of her capital she wants to risk. If she's only willing to risk a small percentage, she might gravitate towards a product with a smaller nominal value, like XSP or MES.
Selecting the Product:
Jane wants direct exposure to the index, so she leans towards SPX or XSP. Given her capital, she can handle the larger contract size of SPX.
Consider Margin Requirements:
If Jane decides to sell a call option, she needs to ensure she has sufficient margin. With her capital, she can handle the margin requirements of the SPX, but she must be cautious not to over-leverage herself.
Final thoughts
The S&P 500 is a significant market benchmark, and the range of products available for trading it offers flexibility to different types of traders. Whether you have a large capital base and seek direct exposure to the index or operate with a smaller account looking for more intricate strategies, there's an S&P 500 product tailored for you.
Always remember, the right product isn't just about potential profits, but aligning with your risk tolerance, trading goals, and strategies. While the array of choices might seem daunting, taking the time to reflect on your needs and understanding the nuances of each product will lead you to make informed decisions.
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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