SPX vs SPY - spread comparison and greeks

[Abundance Magnet]

They are basically the same, since they move the same... both are on SP500.

Difference in some greeks would be due to difference in maturity... difference in American vs European... difference in dividend dates. Possibly some difference in interest rate, since ETF rate is involved.

IV should be the same, since the underlying vol is basically the same...

the difference in the greeks is when comparing different trading platforms. e.g ToS, IB, TS, etc... same strike, expiry, etc... the only difference being the trading platform that is providing the greek (delta, theta, etc...). I don't think I will get the answer as to the formula they use. eg the IB reps don't seem to know.

thanks for your comments on spx vs spy. Bob mentioned something about spx is tied ES futures... hadn't heard of that before. I would have thought they would be tied to SPX. SPX is the 'ground zero' of the index afterall...

 

[JackRab]

Yep, IB reps don't know much about the behind the scenes stuff.

What Bob meant, is that SPX is tied to ES futures because traders follow the most liquid version as underlying... that would be ES futures. And the underlying of that is the SP500 spot index (SPX). But you can argue for a while about what leads what. IMO futures mostly lead the index, since that's most active and tightest spread etc. Spot and future will move like they have an elastic band attached though... sometimes one moves before the other, depending on what drives the market.

So, SPY would be derived from those ES futures as well... because SPY is the SP500 based ETF.

 

[Robert Morse]

Bob mentioned something about spx is tied ES futures..

You can't hedge the SPX options with the SPX index. SPX index is not a tradable symbol. You can only hedge the option trades with SPY or ES futures or ES options. The cost of using SPY is too high for a market maker.

 

[JackRab]

You can't hedge the SPX options with the SPX index. SPX index is not a tradable symbol. You can only hedge the option trades with SPY or ES futures or ES options. The cost of using SPY is too high for a market maker.

To be clear, you could trade SPX as an underlying basket trade... but costly and more difficult. You'll have 500 stocks to swing around.

Most liquid derivative leads. Arbitrage traders keep all in line... and the EFP (Exchange For Physical), which has an active market, is there to possibly trade out of their hedged portfolio.

 

[sle]

Most liquid derivative leads. Arbitrage traders keep all in line... and the EFP (Exchange For Physical), which has an active market, is there to possibly trade out of their hedged portfolio.

More like it's there so people with the best funding can warehouse the risk, but yes

 

[Abundance Magnet]

You can't hedge the SPX options with the SPX index. SPX index is not a tradable symbol. You can only hedge the option trades with SPY or ES futures or ES options. The cost of using SPY is too high for a market maker.

Interesting ... I've just noticed that ndx does not decay the same as SPX. I. E. It should decay more than it actually is. I wonder if this is due to the ES effect? Could also be differences in iv and how iv is priced in...

You can't hedge the SPX options with the SPX index. SPX index is not a tradable symbol. You can only hedge the option trades with SPY or ES futures or ES options. The cost of using SPY is too high for a market maker.

interesting... I was just doing a comparison using the Optionnet software. NDX and SPX do not appear to decay the same way. I was expecting NDX to

More like it's there so people with the best funding can warehouse the risk, but yes

a bit over my head... is this industry talk or where would i read about this? or is knowing that stuff really necessary for trading spy and spx?

 

[harryp]

Yes, (anecdotal based on limited observations) NDX does not decay the same as SPX. Have seen that and currently seeing it. You just need to work around it and I think subconsciously trade NDX and SPX differently although it will be good for me to actually write down the differences.

 

[Abundance Magnet]

Yes, (anecdotal based on limited observations) NDX does not decay the same as SPX. Have seen that and currently seeing it. You just need to work around it and I think subconsciously trade NDX and SPX differently although it will be good for me to actually write down the differences.

yep, MM managing their books. a lot less liquidity, hence more arbitrary pricing by the MM. At least, that's my take on it.

 

[BrooksRimes]

The section 1256 has 2 tax advantages: taxed paid and ease of reporting. A large portion of your SPX short term gains are taxed as long term. And, at tax you do not have to report every transaction. Your broker will give you one YTD P/L amount that you plug into your return. This is because SPX P/L is done mark-to-market from 12/31 to 12/31 of the following year, because SPX is a cash settled index.

Option premiums with SPX are larger vs. SPY which means fewer contracts to trade and lower commissions, if the commission is based on the number of contracts.

Brooks

 

[sle]

a bit over my head... is this industry talk or where would i read about this? or is knowing that stuff really necessary for trading spy and spx?

You don't really need to know anything about the index arbitrage to trade index options at the retail level. However (as we all should be curious and learning constantly), here is a brief summary.

SPX index is something artificial and can not be traded. However, it has liquid futures and has several very liquid ETFs. You can also trade the component stocks for the index, thus replicating it's return. Predictably, there are smart people out there that trade futures against the stocks whenever the prices get out of wack. They are doing what's called "index arbitrage". These traders can be split roughly into two categories - (1) higher frequency players who try to profit from micro-dislocations on very short horizon and (2) guys who find longer term dislocations, usually coming from a mis-pricing of the dividends or discrepancy of the funding rate.

The former group usually trades both futures and the stocks on the exchanges, frequently using all sorts of military grade technology like microwave communications. Their alpha is small and they usually go home flat so they can smoke a joint or two (almost a requirement for an HFT trader these days).

The latter group uses an exchange facility called the "EFP" (exchange for physicals). Most of the index arbitrage desks engaging in this type of business are delta-1 desks at large broker-dealers who have the balance sheet and the funding required to warehouse this risk. These guys usually carry positions into the expiration. They rarely get to smoke a fattie since they work for an investment bank and it's a no-no.

How's that for a summary?