SPX Options vs. SPY Options: You Must Know the Difference

There are many ways to participate in the broad equity market, and trading options on the S&P 500 is one of them. After understanding many of the similarities and differences between SPX options and SPY options, you can see what works best for your trading style.

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• The fundamental difference is that SPX options are based on the $S&P 500, while SPY options are based on the $SPDR® S&P 500 ETF Trust that tracks the index. You can not buy or sell indices directly. In contrast, investors can trade ETFs freely in the open market and potentially receive a dividend every quarter, just like buying stock shares.

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• The difference explains why SPX options are settled in cash (you cannot own the SPX shares) and SPY options are settled in shares once the options are exercised. Moreover, the early exercise can make sense if the dividend exceeds the option's time value for long in-the-money call option positions.

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• SPY options are American-style meaning option holders can exercise their options at any time before expiration. In contrast, SPX options are European style, meaning they can only be exercised on the expiration date. As a result, index options sellers don't have any early assignment risk. For this reason, some spread traders prefer SPX options over SPY options.

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Disclaimer: All trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations