How to Buy SPY Puts

The stock market is volatile enough, but some traders want extra volatility through options. SPY puts allow traders to benefit from short-term downward pressure in the market. Some traders use these derivatives to hedge their portfolios while others use them to speculate the market's future movements.

Buying SPY puts is a bit more complex than buying SPY. Before buying put options, You must know additional details, such as strike prices, expiration dates, and other factors. This guide will show you how to buy SPY puts. And if you are looking to learn more check our guide on how to trade momentum with options.

SPY ETFs Explained

SPDR S&P 500 ETF, often referenced by the ticker SPY, is an exchange-traded fund that tracks the Standard & Poor 500 Index (S&P 500).

This index includes 500 large and mid-cap U.S. stocks in multiple sectors but overweight in technology.

SPY replicates the performance of the S&P Index. Instead of buying 500 individual shares, you can buy a unit of SPY. Thus, your market exposure will be the same but your fees will be lower. SPY fees are very low at 0.095% annually.

The SPDR S&P 500 ETF (SPY) is a popular choice for investors who want exposure to the S&P 500 Index. It offers good liquidity and is well-known. However, there are alternatives that might better match specific investment needs. These alternatives differ in expense ratios, tracking methods, and investment focus. They can suit various risk profiles and preferences. In this discussion, we’ll look at different alternatives to SPY. We’ll highlight their features, benefits, and potential downsides. This information can help investors find the best options for their portfolios. Whether seeking lower costs, better diversification, or specific investment types, the ETF market has diverse choices available.

Shares Core S&P ETF (IVV)

The Shares Core S&P ETF (IV V) provides an efficient way to track the S&P 500 Index, granting access to the large-cap U.S. equity market with high liquidity and low fees. By employing market capitalization weighting, IV V closely replicates the index, with larger companies influencing performance more significantly. It is recognized for its low expense ratio and almost identical holdings compared to other S&P 500 ETFs, making IV V a viable choice for investors looking for diversified exposure to leading U.S. companies at a reduced cost.

Vanguard S&P 500 ETF (VOO)

The Vanguard S&P 500 ETF (VOO) tracks the S&P 500 Index, providing access to 500 major U.S. companies from different sectors. It has a lower expense ratio than SPY, which may attract cost-conscious investors who still want good performance. VOO’s holdings are closely aligned with the index, making it a reliable choice for those interested in diversifying or investing for the long term within the U.S. stock market.

SPDR Portfolio S&P 500 ETF (SPLG)

The SPDR Portfolio S&P 500 ETF (SPLG) offers an affordable option for investing in the S&P 500 Index, which includes 500 leading U.S. companies. SPLG is notable for its lower expense ratio, appealing to investors looking for long-term growth with minimal management fees. Its straightforward design and wide market coverage make SPLG a viable choice for both novice and seasoned investors interested in cost-effective access to the U.S. stock market.

Best Online Brokers for ETFs

Investing in ETFs is one of the easiest ways to invest. Check out our list of recommended brokers:

History of SPY

As the oldest U.S.-listed ETF, SPY was launched in January 1993. It was introduced by State Street Global Advisors and listed on the NYSE Arca exchange under the ticker SPY. Since the

start, it has been tracking the performance of the S&P 500 with deviations of less than 0.15%.

As of July 19, 2024, it has $557.63 billion in assets under management. 

The following table shows the main differences between the SPX and SPY options.

It's also important to note that just like SPY lists for 1/10th of the SPX index value — SPY options trade for approximately 1/10th of the price of SPX options.

While SPX options have an expiry advantage and favorable tax treatment, SPY options have an advantage in dividends, settlement, strike and margin. SPY offers $1 wide strikes.

Why SPY Puts Are So Expensive

The main reason why the Puts are more expensive than the Calls is due to demand differences. When measured from the same distance (equidistant), out-of-the-money puts are in much higher demand and therefore higher priced than out-of-the-money calls. For a comprehensive outlook, check out our take on puts vs calls.

In the options trader jargon, this is classified as Implied volatility (IV). Implied volatility is the uncertainty related to an option's underlying asset.

Implied volatility and the price skew; Source: Science Direct

As the demand for an option increases, the implied volatility increases and so does the price.

Historically, OTM puts were not expensive until the historic crash of 1987 caused their price to rise. Now everyone wants to have insurance against potential severe price declines. For more information check out our podcast episode on how to protect your portfolio from a bear market.

Take a look at a couple of strategies to short the S&P 500 Index (SPY).

Inverse ETFs provide a simple solution if you do not want to hold short positions. You simply buy an inverse ETF as it goes up as the underlying asset goes down. These ETFs are constructed using various derivatives.

The most popular include ProShares Short S&P 500 (NYSEARCA:SH) and Direxion Daily S&P 500 Bear (NYSEARCA:SPDN). While these two are designed to provide 1x inverse exposure to SPY, there are ETFs for 2x or even 3x inverse exposure. Yet, using leveraged ETFs requires strong risk management due to the fact that compounding works both ways.

Also known as bear market mutual funds — these funds consist of a short portfolio that covers an entire index. In this case, it is 500 stocks from the S&P 500. In some instances, these can also be actively managed, with portfolio managers going overweight/underweight certain stocks to increase returns.

If you are hedging exposure to the entire index, you might stick with the equal-weight options. An example would be the Rydex Inverse S&P 500 Strategy Fund (MUTF:RYUHX).

Put Options

You can buy a put option for either SPX or SPY. But you might want to stick with the ETF due to notional value, strike price offer and liquidity.

SPY option holds a lower notional value (1/10th) than a standard SPX contract offering more flexibility and a tighter spread between the bid and offer — making it more price efficient. It's also the more liquid of the 2.

Index Futures

Originally futures were created as a price guarantee for commodity producers. Yet due to their derivative nature, they have a speculative application in a variety of markets, including stock indices.

Index futures are cash-settled — when you buy an index future you are making a trading agreement of a specific index at a specific price on a specific date.

The main advantages of index futures are liquidity, standardization and leverage. The standard size of the S&P 500 futures contract is 250 times the value of the S&P 500. The smaller contract, E-mini, is valued at just 50 times — making it a popular choice for retail traders due to lower margin requirements.

SPY ETF's Top 7 Holdings

SPY ETF is weighted by a market cap. Thus the largest stocks have the biggest impact on the performance and volatility of the index.

As of November 2023, the top 7 holdings consist of over 25% of the fund's total assets.

A Tool for Insurance and Speculation

Stocks can go up for quite a while but you have to be ready for the corrections. If you have long S&P exposure (especially if overweight in the above-mentioned stocks), having a hedge short position can buy you peace of mind.

Yet, be careful not to overdo it.

As a legendary fund manager, Peter Lynch said, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

Frequently Asked Questions