Quote from kxvid:
Advantages:
SPY options have tighter spreads than the ES
Very, very good liquidity
Commissions much cheaper than index futures if you use a flat rate broker
Disadvantages:
Not tax advantaged like futures
Subject to time decay
Much more subject to tracking error than futures due to increases/decreases in volatility
I used to think futures where the end all. But after a second look SPY options might be a better choice for my purposes.
My take is that it depends on your holding period. I trade intraday but don't end each day flat. The exposure to overnight moves when I trade SPY options is something I don't always want (I want it if the overnight ES action moves in my favor, but don't want to either turn a winner into a loser or not maximize my gain according to my strategy), so I've now developed a strategy to trade the ES during the overnight session as needed to neutralize the SPY positions I might be holding because my exit trigger didn't hit during the day, but did hit overnight. For every 5 SPY option contracts I'm holding overnight, I will trade 1 ES contract to "lock-in" the gain or limit my loss to what my strategy dictates it should be for that given trade. Also, I might end the day session flat but a trade triggers overnight, in which case the ES is my only way of getting in to that trade. With so much action happening overnight these days, it seems like you'd want to have access to a trading vehicle which allowed you to trade that action.
But, if you are a daytrader, I think the SPY options with deltas near 1 are a good vehicle for the reasons you mention, but I think you are incorrect that these options are not tax advantaged like futures. They are actually taxed in the same way.
http://indexoptionstrading.alliancemtg.com/tax-advantages-of-trading-index-options/
Also, as I mentioned above, the "baked-in" loss on an ES trade is about $15 more than the equivalent SPY options trade, if the SPY option bid-ask spread is .01. That's not always the case and with the options with deltas near 1 sometimes there is less liquidity and bid-ask spreads are larger than that. My experience has been that to virtually guarantee a bid-ask spread of .01 on an SPY option, you have to accept a delta of around .85, which means that instead of 5 SPY option contracts for each ES contract, you need to buy 6 SPY option contracts to get the same level of exposure, in which case your "baked in" loss is $12, not $10. Still better than the ES, though.
But, to go back to the daytrader scenario, you can get daytrader margins with the ES that enable much more leverage than you can get with SPY options for the same amount of capital. If I knew that every trade I open would be a daytrade and didn't ever hold a position overnight, I'd go with the ES, assuming that I wanted that much leverage. If you are daytrading a strategy which statistically allows for that much leverage, you just can't get it with options because the low-cost ones simply don't have the deltas to match the ES' "delta" of 1.
