Index Options vs. ETF Options????

L

LakeTrade

I normally trade ETF Calendar spreads on SPY, QQQQ, DIA and IWM. I have been happy with my outcome but have noticed commissions eating more and more into my profit especially on the QQQQ’s. Same percentage but the number's getting bigger with more contracts. Already use IB so commissions are fair.

Having read information on Index options as to tax benefits (60/40), lower commission cost (larger contract size) and European style contract it all sounds good, but my concerns are the following:

•Much higher spread cost when comparing the Index to the ETF calendar. Ie.: 1 SPX 1100 Dec/Jan Calendar spread cost $1,150.00 and 10 SPY 110 Dec/Jan Calendar spreads cost $960.00. (Prices are the middle of the bid/ask spread and do not include commissions). Why the price difference?

•Watching this month’s spreads, Nov/Dec calendar, nearing expiration just the opposite appears to be true. Ie.: The Index spread appears to be cheaper than the ETF spread? Not sure if this is because the Index expires one day before the ETF options or some other reason?

•Bid/Ask spreads on Index options appear to be very wide compared to ETF's? Ie.: Using the example above the spread on the Index Calendar was about $300 and only $100 on the ETF. To be honest I always seem to get the “Middle” on the ETF calendar and have tried for 2 months to get the “Middle” on Index calendar and have not gotten it once!

•Index options two months out have very low volume with wild Bid/Ask spreads?

The above shows the SPX-vs-SPY but I have noticed the same on NDX-vs-QQQQ, RUT-vs-IWM and DJX-vs-DIA. It almost appears that the tax and commission savings advantages are lost when you consider everything.

What am I missing???

I guess my real question is am I wasting my time trying Index Options and should I just stay with ETF options?

Thanks
LakeTrade
 
•Bid/Ask spreads on Index options appear to be very wide compared to ETF's? Ie.: Using the example above the spread on the Index Calendar was about $300 and only $100 on the ETF. To be honest I always seem to get the “Middle” on the ETF calendar and have tried for 2 months to get the “Middle” on Index calendar and have not gotten it once!
More...

This is the question here: if you can get better trades with etf's options... I have not doubt about that.
 
I trade alot of the Mini Nasdaq, Its MNX. It is still an index but has a great size for people moving up from the QQQQ. It trades at most of the exchanges so it is liquid and has tighter spreads than what you see on the SPX and OEX. It is 1/10th the size of NDX.

Remember the SPY is 1/10th the size of SPX so SPX spreads are 10x larger than that of SPYs to compensate.

For someone trading ETF's and wanting to trade index options, MNX is a nice sweet spot.
 
Thank you for the replys. I have looked at the MNX and they still didn’t appear to be as tight as the QQQQ’s. The size of the SPX, NDX and RUT appear to fit within my plan. Currently my monthly Calendar positions are about 200 contracts on the Q’s, 100 contracts each on the SPY, DIA and about 150 contracts on the IWM. I feel the indexes will still give me the positon size flexibility I need for adjustments.

I guess I was hoping that someone has compared the final results of the Index options to that of the ETF options after taking commissions, spreads and taxes into consideration??? But to be honest, I would bet the exchanges and or market makers have already taken all that into consideration and it all works out to be the same in the end?????

Thanks again for replies and insight.
 
trade size, risk/reward, and commision cost trade-offs are aspects of option trading that i have been working to optimze for my trading comfort and capability levels. i am mainly doing spy etf spreads. i find the spy "better" (b/a spreads, volume, etc. as you mentioned) for my trading, but i watch q, dia, iwm.

for myself, i find it easier to follow the action of the underly with spy. the rewards may be smaller and the commish higher, but for the trade off, i seem to understand what i am doing, more/so than with the futures indexes. so for now, the the extra "costs" ,i am willing to pay.


there is a blog about trading mnx options that i have read for some time and he eventually went to trading the ndx because of lot size and commish. I started reading it because i was a big q fan and thought i might graduate to mnx but eventually found i just could not get a good enough "feel" for the indexes and spy seemed to be a better fit for me.
 
Be careful on the European and American difference. If you trade Europeans you will get less premium than an American option.

1) 1100 SPX != 110 SPY There is a slight difference that can occur during cycles. It all balances out over the long haul, but there is a big enough difference that there was a single strike mismatch.

2) Check the above.

3) Getting the middle. Hmm... Sometimes I get it sometimes I don't. With Index options you are playing with the big boys and they do play games.

4) The bid ask spread could be wild, but I have found them to not be that bad.

I tried the SPY and did it for two cycles. Now I only trade future options or options on indicies because I find the returns are much better there. The other thing you need to watch out for is margin. I know a brokerage like IB will give you much better margins than say ToS.

Quote from LakeTrade:

I normally trade ETF Calendar spreads on SPY, QQQQ, DIA and IWM. I have been happy with my outcome but have noticed commissions eating more and more into my profit especially on the QQQQ’s. Same percentage but the number's getting bigger with more contracts. Already use IB so commissions are fair.

Having read information on Index options as to tax benefits (60/40), lower commission cost (larger contract size) and European style contract it all sounds good, but my concerns are the following:

•Much higher spread cost when comparing the Index to the ETF calendar. Ie.: 1 SPX 1100 Dec/Jan Calendar spread cost $1,150.00 and 10 SPY 110 Dec/Jan Calendar spreads cost $960.00. (Prices are the middle of the bid/ask spread and do not include commissions). Why the price difference?

•Watching this month’s spreads, Nov/Dec calendar, nearing expiration just the opposite appears to be true. Ie.: The Index spread appears to be cheaper than the ETF spread? Not sure if this is because the Index expires one day before the ETF options or some other reason?

•Bid/Ask spreads on Index options appear to be very wide compared to ETF's? Ie.: Using the example above the spread on the Index Calendar was about $300 and only $100 on the ETF. To be honest I always seem to get the “Middle” on the ETF calendar and have tried for 2 months to get the “Middle” on Index calendar and have not gotten it once!

•Index options two months out have very low volume with wild Bid/Ask spreads?

The above shows the SPX-vs-SPY but I have noticed the same on NDX-vs-QQQQ, RUT-vs-IWM and DJX-vs-DIA. It almost appears that the tax and commission savings advantages are lost when you consider everything.

What am I missing???

I guess my real question is am I wasting my time trying Index Options and should I just stay with ETF options?

Thanks
LakeTrade
More...
 
Quote from christianhgross:

Be careful on the European and American difference. If you trade Europeans you will get less premium than an American option.

1) 1100 SPX != 110 SPY There is a slight difference that can occur during cycles. It all balances out over the long haul, but there is a big enough difference that there was a single strike mismatch.

2) Check the above.

3) Getting the middle. Hmm... Sometimes I get it sometimes I don't. With Index options you are playing with the big boys and they do play games.

4) The bid ask spread could be wild, but I have found them to not be that bad.

I tried the SPY and did it for two cycles. Now I only trade future options or options on indicies because I find the returns are much better there. The other thing you need to watch out for is margin. I know a brokerage like IB will give you much better margins than say ToS.
More...

How does IB give you better margins on the options trades compared to TOS?
 
Quote from mike007:

How does IB give you better margins on the options trades compared to TOS?
More...

No idea why, but they do. I compared the margins with a friend for an identical position at the same time and I got better margins.

At the time I think it was for a naked ES position. IB gave me a margin requirement of around 2300 USD per contract, and ToS was around 3350 USD per contract.

The margins that a brokerage gives you is dependent on the brokerage. Yes the exchanges require a certain amount, but it is up to the brokerage to pass it on. I am guessing ToS is protecting itself more than IB.
 
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