XSP Options Vs. SPY Options: The Critical Differences (And Hidden Benefits)

Cboe Global Markets’ CBOE Mini-SPX (XSP) index options offer traders the ability to engage in index options at one-tenth the cost of standard SPX options contracts, but there’s more to XSP options than just that. 

Since XSP options belong to the index option category, they share the benefits of typical index options. Compared to SPY options, for example, XSP options have access to global trading hours, may be eligible for better tax treatment and may be able to reduce risk. SPY options, on the other hand, only offer traders greater accessibility to the options market via affordable pricing, a feature already available with XSP options. 

XSP Vs. SPY Options: An Overview

XSP options are option contracts based on the Standard & Poor 500 Index, while SPY options are those based on the Standard & Poor 500 exchange-traded fund (ETF). This is a subtle distinction, but one with significant implications. 

First, XSP options may be eligible for more favorable tax treatment compared to SPY options. “Under section 1256 of the Tax Code, certain exchange-traded options, including XSP and MRUT, may qualify for 60% long-term and 40% short-term rates, even if the option is held for less than a year. With 2019 long-term capital gains rates ranging from 0-20% versus short-term capital gains rates of 10-37%, mini index options may allow you to keep more of your trading profits,” says Cboe. SPY capital gains are often considered short-term; therefore, they are taxed at ordinary income tax rates.

Second, XSP options employ a European exercise style, meaning the contracts cannot be exercised until expiration, eliminating the risk that the buyer will exercise his right prematurely. 

Third, XSP index options settle in cash rather than physical shares. Thus, investors immediately receive the price difference in the shares of the underlying asset and the option’s strike price rather than receiving the shares and then having to sell them on the open market. This mitigates the risk of profit loss via random market fluctuations before the sale of shares. 

Lastly, global trading hours are applicable to XSP options but not to SPY options. Investors gain flexibility using XSP options by increasing the time horizon in which they have access to the markets. Additionally, global trading hours allow participants to react to unexpected market events nearly anywhere across the globe. In certain circumstances, like SVB’s collapse for example, these unexpected events can be massive opportunities.  A detailed outline of XSP’s global trading hours can be found here. 

Learn more about XSP options here.

Featured photo by Nicholas Cappello on Unsplash

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