October 2, 2022

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What exactly is an SPX option?

An SPX option is a type of stock option that gives the holder the right to purchase shares of the S&P 500 Index at a fixed price by a designated date. It’s essential to understand what these are if you’re looking to invest in the stock market, as they can provide tremendous opportunities for profiting from price movements. Let’s take a closer look at SPX options and how they work here.

What is an SPX option, and what does it represent?

An SPX option is a stock option that gives the holder the right, but not the obligation, to buy or sell shares of the SPDR S&P 500 ETF (SPY) at a predetermined price (the strike price) on or before a specified date (the expiration date). SPY is an ETF that tracks the S&P 500 Index, a basket of 500 large US stocks.

The holder of an SPX option pays a premium to the writer (seller) of the option for this right. If the underlying SPY ETF is trading below the strike price at expiration, the option expires, and the holder loses their premium. However, suppose SPY is trading above the strike price at expiration. In that case, the option is said to be “in the money”, and the holder can exercise their right to buy SPY at the strike price, selling it immediately at the higher market price for a profit.

SPX options are cash-settled, meaning that no actual SPY shares are exchanged when the option is exercised. Instead, the writer of the option pays the holder the difference between the strike price and the current market price of SPY. SPX options are American-style options, meaning they can be exercised at any time up until expiration. European-style options can only be exercised on the expiration date itself.

What are some key things to know about SPX options?

Here are a few key things to keep in mind if you’re thinking about trading SPX options:

  • SPX options are physically settled, meaning that no actual shares of the underlying asset are exchanged when the option is exercised. It is different from futures contracts, which are always physically settled.
  • SPX options have a standard contract size of 100 shares.
  • SPX options are traded on the Chicago Mercantile Exchange (CME), and the ticker symbol for SPX options is “SPX.”
  • The CME offers two SPX options: mini SPX options and full-sized SPX options. Mini SPX options have a contract value of $50 times the S&P 500 Index, while full-sized SPX options have a contract value of $100 times the Index.
  • SPX options have a standard expiration cycle of quarterly options expiring on the third Friday of March, June, September, and December.
  • SPX options are P.M.-settled, meaning that the option price is based on the closing price of SPY on the expiration date.

When can you use SPX options to your advantage in the marketplace?

SPX options can be used to traders’ advantage in a variety of ways, including:

Long straddle: This involves buying both a call option and a put option with the same strike price and expiration date. The trader profits if the underlying asset (in this case, SPY) makes a significant move in either direction. However, the trade will only be profitable if SPY moves significantly higher or lower than the strike price; if it doesn’t, the trader will lose money.

Strangle: This is similar to a straddle, except that the trader buys an out-of-the-money call option and an out-of-the-money put option. This strategy requires a more significant move in SPY to be profitable, but it also results in a lower premium since the options are further from the current price of SPY.

Many traders use SPX options as part of a hedging strategy: For example, a long SPY trader may buy an SPX put option to hedge their position. If the stock market falls, the put option will increase in value and offset some of the losses from the decline in SPY.

Whether you’re using options to speculate or hedge, it’s important to remember that risk is always involved. Options are leveraged, meaning small moves in the underlying asset can result in large profits or losses. To preserve your capital, use stop-loss orders and other risk management methods.

SPX options are versatile tools that can be used in several ways. By understanding the critical characteristics of SPX options, you’ll be better prepared to take advantage of them in the marketplace. Visit this page for more information on SPX options and other options trading strategies.