spx spy play and question

[raf_bcn]

Hi
As I said I'm in the begining of the way to understand options and futures and the relation between them and de underlying.
So I appologise if some question is absurd or out of place.
Now I'm focused on the relationship between Spy Spx and /Es
If we watch a grafic of SPY*100-SPX we can clearly see a cycle of three months in which the difference goes from aprox. -7 to +5.
That's a 12 points difference that repeats every time. This cycle begins the day after SPY pays dividends.
The question is if it's possible to take advantge of this. It seems a no risk strategy, buying Spy and selling Spx in the begining of each cycle.
Yes Spx can't be selled , but there are Spx futures and options, and future's options. A lot of combinations.
And it's better if we use other's money.
I.e. Long Spy by doing this
Sell 10 260 put for 25,66
Buy 10 260 call for 0,01

short SPX by
Sell 2350 call for 48,50
Buy 2350 put for 43,30

Total credit 30,65


I also want to ask if any of these ideas may be good from theory but the practice is unreasible for some reason.
Thank you

 

[stepandfetchit]

Re: If we watch a grafic of SPY*100-SPX we can clearly see a cycle of three months in which the difference goes from aprox. -7 to +5.
Answer: NO! You are observing two views of same animal! SPY pays dividends, SPX is INDEX which uses a price that approaches that of a continuous dividend of what the SPY is doing. -- No raccoon up that tree.

 

[TradingDemystified]

The numerical value of SPX is calculated by a formula that takes into account only stock prices (with no accounting for dividends whatsoever)

OPTIONS on SPX for a certain expiration will reflect the fact that some of SPX's components (dividend-paying stocks) will have a price that will decrease by a known (or estimated to be known) amount (the amount of the component's dividends)

Because of this, calls for SPX will be reduced by the present value of the (estimated) dividend stream during the life of the option.

If you want to synthetically be short SPX you will need to sell (reduced) calls and buy (expensive, because of put-call parity) puts.

Also, going long SPY implies buying calls and selling puts, but the option market reflects the fact that at a certain point, SPY will decrease by the amount of the dividend, so even if SPY is going up (inflated by upcoming dividends), the calls will not go up in tandem because the price for the calls reflects the fact that a dividend will make the SPY price (eventually) go down by that amount.

Whatever edge you (thought you) had knowing that SPY will be going up relative to SPX will be negated by the fact that the market incorporates the pricing of dividend streams into the option pricing model for both ETF options (SPY) and Index Options (SPX)

 

[JackRab]

You're trading apples and oranges. Well... maybe more like apples and pears... they are not the same... there are differences in dividends and interest calculations...

 

[stepandfetchit]

You're trading apples and oranges. Well... maybe more like apples and pears... they are not the same... there are differences in dividends and interest calculations...

Jack: Why would there be differences in the "interest rate"? I think they should be the same, but may be missing your point!

 

[stepandfetchit]

TradingDemystified

Please provide proof of this "false" statement:
"The numerical value of SPX is calculated by a formula that takes into account only stock prices (with no accounting for dividends whatsoever)"
I would like to be wrong.

 

[TradingDemystified]

TradingDemystified

Please provide proof of this "false" statement:
"The numerical value of SPX is calculated by a formula that takes into account only stock prices (with no accounting for dividends whatsoever)"
I would like to be wrong.

I am not an expert on Indices and their construction, but it is my understanding that the SPX is instantaneously calculated from the market cap (actually, float)-weighted prices of its components.

If anyone knows anything differently I would love to know ;-)

https://en.wikipedia.org/wiki/S&P_500_Index#Versions

 

[JackRab]

Jack: Why would there be differences in the "interest rate"? I think they should be the same, but may be missing your point!

Yeah... wait.... I'm looking into this, let me think this through.

I don't know whether SPX options are daily settled Marked-to-Market? That would mean there's no interest involved in the actual options, since you don't have to pay the full options amount. That would mean all the strikes are based on the Future, without discounting any options premium paid.

With SPY options, they are definitely not MtM so they have to be discounted... and so there's a difference in interest components.

So if OP would trade a large BOX, like the one he proposes 2350-2600, both legs/synthetics have a different interest component. Although, I guess the 2350 SPX is basically ATM so there's hardly any interest on options premium outlay anyway... so my reasoning isn't entirely valid.

 

[JackRab]

TradingDemystified

Please provide proof of this "false" statement:
"The numerical value of SPX is calculated by a formula that takes into account only stock prices (with no accounting for dividends whatsoever)"
I would like to be wrong.

Yeah, he is wrong about this, since SPX-level does lose points whenever an underlying stock goes ex-div. That's what the futures SPX and ES reflect by trading below the index-level.

 

[JackRab]

Re: If we watch a grafic of SPY*100-SPX we can clearly see a cycle of three months in which the difference goes from aprox. -7 to +5.
Answer: NO! You are observing two views of same animal! SPY pays dividends, SPX is INDEX which uses a price that approaches that of a continuous dividend of what the SPY is doing. -- No raccoon up that tree.

I am a little bit surprised that SPY starts the cycle below the index though. So how can that be explained?.... Let me think about this for a few minutes...

I don't get why it starts below the index.... breaking my head about that.

So the swing is due to the dividend, since on average SPY pays out 1.10 quarterly in dividends. Which is the same for SPX, but that is indeed continuously paid. So SPX during the quarter gradually loses 1.10 (or 11 in the 10x SPY-SPX spread) to SPY, then at the end of the quarter when SPY pays the 1.10 div, it's caught up to the index.

So a valid arb would be one that captures a swing greater than the dividend... on average > 1.1 (11).

But again, why start below the index????