Why Mini-SPX Index Options May Be An Attractive Alternative For SPY (ETF) Options Traders

Option contracts for the S&P500 exchange-traded fund (ETF) SPY are one of the world’s most traded contracts. Their affordability, liquidity, portfolio diversification benefits and ease of use have attracted millions of trades from all over the world, leading many to believe they offer the best entry into options trading. 

An alternative is challenging that notion. Introduced by Cboe Global Markets Inc. CBOE, the Mini-SPX product, an options contract based on the S&P 500 Index, possesses all the benefits of standard SPY options and adds to them some of its own. 

Similar in notational size to SPY options, XSP® options are designed at 1/10th the size of standard SPX® options contracts. This smaller size provides greater flexibility for new index options traders or other individuals managing their portfolios. With XSP options, traders can effectively manage their exposure to large-cap U.S. equities while executing risk management, hedging and income generation strategies.

A notable advantage of XSP options is their European exercise style, as opposed to the American exercise style of SPY contracts. European exercise ensures that there is no chance of early assignment, providing traders added security over their positions. XSP options are also cash-settled, eliminating the risk of unwanted delivery of physical shares and any price deviations that may arise after their delivery. For example, a trader may receive their physical shares of SPY just before an unfavorable Consumer Price Index (CPI) report and find that they’re down 4% on the shares they were delivered in the morning. This kind of risk is reduced by XSP options. 

Despite being just as affordable as SPY contracts, XSP options also offer potential tax benefits. While SPY contracts are primarily taxed based on standard tax rates, XSP trades may be eligible for a 60/40 tax treatment. This means that 60% of profits are taxed as long-term capital gains and 40% as short-term capital gains. Moreover, in terms of settlement, both XSP and SPY options are PM-settled. However, XSP contracts have the additional advantage of global trading hours. Traders can react to news and market developments from anywhere in the world, reducing overnight risk and enabling them to capitalize on opportunities quickly.

Although SPY options have traditionally been the preferred choice for market participants, XSP index options are steadily gaining market share. According to Cboe Global Markets, the average daily volume of XSP has experienced significant growth in recent years. This trend indicates that more investors are recognizing and appreciating the benefits offered by XSP index options.

To learn more about XSP options and explore their advantages further, click here.

Featured photo by Jason Briscoe on Unsplash.

This post contains sponsored content. This content is for informational purposes only and not intended to be investing advice.