What are SPX options?

SPX options are financial contracts tied to the S&P 500, a benchmark index representing the performance of 500 leading U.S. companies. Introduced by the Chicago Board Options Exchange (now Cboe Global Markets) in 1983, these options have become a popular tool for managing risk and speculating on market direction. Renowned for their liquidity and flexibility, SPX options are widely used by traders and investors to navigate the broader stock market.

Like stock and exchange-traded fund (ETF) options, SPX options offer call and put contracts and support a broad range of trading strategies. However, they also offer potential advantages. They provide multiple expiration types, catering to both short-term traders and long-term investors. As European-style options, SPX contracts can only be exercised at expiration, eliminating the risk of early assignment. Traders may also benefit from a 60/40 tax treatment, and their ability to trade until market close adds flexibility while reducing the risk of early position closeouts.

However, index options, including SPX options come with higher costs, including commissions and exchange fees. These fees cover the infrastructure and processing required for trading and may vary by broker. It’s important to carefully review the fee structure to understand the costs of trading SPX and other index options before entering the market.

Examples

John holds a stock portfolio that closely mirrors the performance of the S&P 500 index. Concerned about a potential market selloff, he decides to purchase SPX put options with a 60-day expiration. If the index declines, the value of his puts will likely rise, helping offset losses in his portfolio. However, to effectively hedge, John must consider factors like the implied volatility of the options, the size of his SPX position relative to his portfolio, and the timing of his trade’s entry and exit to achieve the best results.

Kelly, meanwhile, prefers trading the S&P 500's movements directly through SPX options rather than individual stocks. When bullish, she employs strategies like long calls, call debit spreads, or put credit spreads. For bearish scenarios, she opts for long put options, call credit spreads, or put debit spreads. Kelly chooses SPX options because they are cash-settled, European-style (removing the risk of early assignment on short options), and any profits often qualify for favorable tax treatment compared to ETF options, making them an efficient tool for expressing her market outlook on the Nasdaq 100.

Options, whether tied to individual stocks, ETFs, or indexes like SPX, share core characteristics. They’re standardized contracts listed on options exchanges and can be used for speculation—positioning for price movements—or for hedging—protecting against adverse market shifts. All types of options can be traded individually, such as buying calls or puts, or as part of advanced strategies like spreads, allowing flexibility to align with specific risk-reward profiles and market outlooks.

Despite these similarities, there are key differences between stock, ETF, and index options. Stock and ETF options grant the right, but not the obligation, to buy or sell the underlying shares, with each standard contract representing 100 shares. For example, one call option allows the purchase of 100 shares, while one put option allows their sale. Stock ownership includes dividends and voting rights, benefits not tied to options themselves.

In contrast, index options like SPX options are tied to benchmarks such as the S&P 500, which can’t be directly bought or sold—there are no shares. Index options are cash-settled at expiration, meaning no shares change hands. At expiration their value is based on the difference between the index level and the strike price, and whether they’re in or out of the money.

A major distinction is settlement style. Stock and ETF options are American-style, allowing exercise at any time before expiration. SPX options, however, are European-style, meaning they can only be exercised at expiration. This simplifies management for traders with short positions by eliminating the risk of early assignment but limits flexibility for long option holders.

Another key difference is the notional value. SPX options represent 100 times the index level. For example, if SPX is trading at 6,000, one SPX option contract has a notional value of $600,000. In contrast, ETF options, such as those on SPY (which trades at roughly 1/10th the value of SPX), represent 100 shares of the ETF, resulting in a significantly lower notional value. This difference means SPX options typically have higher premiums, require larger capital commitments, and offer greater leverage—but also come with greater risk.

The S&P 500 index is one of the most widely recognized market benchmarks globally, serving as a key barometer for the U.S. stock market's performance. Managed by the S&P Dow Jones Indices Index Committee, the S&P 500 comprises 500 companies chosen for their size, liquidity, and industry representation. The committee updates the index periodically, replacing stocks affected by events like mergers or delistings.

The S&P 500 is market-cap-weighted, meaning a company's influence on the index is proportional to its market capitalization, which is calculated by multiplying its stock price by its total outstanding shares. Larger companies, like Apple or Microsoft, have a greater impact on the index’s movements than smaller ones. The index’s value is determined by summing the market values of its 500 companies and dividing by an adjusted divisor. This divisor accounts for stock splits, dividends, and other corporate actions to ensure the index remains consistent over time.

The S&P 500 is diversified across 11 sectors, including technology, healthcare, financials, energy, consumer discretionary, real estate, utilities, materials, industrials, communication services, and consumer staples. This sector diversity makes it a comprehensive gauge of broad market trends and the overall U.S. economy.

A stock index, like the S&P 500, is composed of individual stocks, and each stock contributes to the index’s overall performance. There are several macro and micro factors that can impact the performance of the index including, but not limited to:

• Earnings: Earnings season typically begins two weeks after the end of each quarter (mid-April, mid-July, mid-October, and mid-January). Since the index is market-cap weighted, the earnings of larger companies have a greater influence on its performance than those of smaller ones.
• Interest rates: Anticipated changes in interest rates by the Federal Reserve or sudden bond yield spikes can significantly move stocks, which typically favor lower rates.
• Market sentiment: Bull and bear market cycles often amplify swings, with prevailing sentiment driving broader bullish or bearish trends.
• Economic data: Key indicators, such as jobs reports, GDP, and retail sales figures, among others, can cause short-term volatility in indexes like the S&P 500.
• Geopolitics: Events like elections, political instability, or military conflicts can impact global markets and stock indexes.
• Regulation: Changes in regulations can affect specific stocks or industries, creating ripple effects across the index.

Additionally, futures, international, and commodities markets all influence U.S. stock prices. Futures reflect market expectations, guiding opening and intraday trends. Global markets shape sentiment through overnight trends, economic data, geopolitical events, and currency fluctuations. Commodity prices, like oil, impact indexes by affecting corporate profitability, inflation, and market sentiment. How are index options priced? Index options are priced based on several key factors that determine their premium (the cost of the option). These factors include:

1. Underlying index price: The current value of the index plays a significant role in pricing. Options with strike prices closer to the index's current value (at-the-money) are typically more expensive than those further away (out-of-the-money).
2. Strike price: The relationship between the option's strike price and the index's current price affects its intrinsic value. For example, a call option is more valuable when the strike price is below the index value, while a put option is more valuable when the strike price is above the index value.
3. Time to expiration: Options with more time remaining until expiration generally have higher premiums due to the increased likelihood of the index price moving favorably.
4. Implied volatility: This measures the market's expectations for future price swings in the underlying index. Higher implied volatility increases the option premium, reflecting greater uncertainty.
5. Interest rates: Changes in interest rates can affect the cost of carrying an option position, influencing pricing. Higher rates tend to increase call option premiums and decrease put option premiums.
6. Dividends: While an index itself doesn’t pay dividends (as it represents a group of stocks rather than actual shares), the expected dividend payouts from its component companies can influence option pricing by affecting the index's projected future value.

These factors are combined in option pricing models, such as the Black-Scholes model, to calculate theoretical fair market premiums. However, actual option prices are ultimately shaped by the push and pull of buyers and sellers in the market. As participants trade options, their activity adjusts prices in real time, aligning them with current market conditions, sentiment, and expectations. This interplay between theoretical values and real-time demand ensures option prices dynamically reflect the ever-changing market landscape.

Index options provide a range of expiration choices to suit various trading strategies. Standard monthly expirations occur on the third Friday of each month, while weekly expirations are available every Friday for near-term trading. Additional expirations, such as quarterly, end-of-month, and daily options (expiring Monday through Thursday), offer traders flexibility to target specific timeframes for short-term speculation, risk management, or long-term hedging.

Index options can be AM-settled or PM-settled, depending on when the settlement value is determined. AM-settled options, often associated with standard monthly expirations, are based on the opening prices of the index’s components on expiration day. PM-settled options, which use the index’s closing price, are typically used for weekly and daily expirations.

Traders can hold index options until expiration, but many positions are closed early through offsetting trades. For example, if you buy an option, you can sell the same option before expiration, realizing gains or losses based on the difference between the entry and exit prices. Partial closures are also an option when managing multiple contracts. Keep in mind that commissions apply to both opening and closing trades.

If held to expiration, the outcome depends on the option's status. At-the-money (ATM) or out-of-the-money (OTM) options expire worthless, while in-the-money (ITM) options are automatically exercised or assigned. Since index options are cash-settled, no physical shares are exchanged. Instead, any profit or loss is credited or debited to the trader’s account based on the settlement price.

Keep in mind, options expirations can be affected by holidays, with expiration dates adjusted to the preceding trading day if the scheduled date falls on a market holiday.

The SPDR 500 Trust, trading under the symbol SPY, is the largest ETF with hundreds of billions in assets under management. It was initially designed to represent 1/10th the value of the S&P 500 index, though its value is slightly adjusted by management fees and dividend payouts to shareholders, which don’t apply to the index. For example, if the S&P 500 is at 5,000, SPY would typically trade around $500 per share.

As an ETF, the SPDR 500 Trust is a pooled investment vehicle that holds the actual stocks in the index. SPY shares trade like a stock on exchanges, allowing investors to buy and sell shares throughout the trading day. This structure means SPY options, like stock options, settle American-style and for shares. By contrast, SPX options, tied directly to the index, are European-style and cash-settled, as the index itself can’t be bought or sold directly.

A key limitation of SPX compared to SPY is that certain strategies involving shares and options, such as covered calls, are not possible with SPX since it doesn’t involve physical shares. Additionally, SPX's larger scale—roughly 10 times the value of SPY—results in significantly higher notional values, premiums, leverage, and associated risks for SPX options compared to SPY options. This makes SPY a more accessible choice for many retail traders, while SPX is more attractive for traders seeking larger exposures or specific index-based strategies.

Index options, like other options, carry inherent risks that new traders should carefully consider. Similar to equity or ETF options, the primary risks include the potential to lose the entire premium paid for long positions and significant losses when selling uncovered options. Additionally, options are time-sensitive, losing value as expiration approaches—a factor that requires careful attention to market timing and volatility. For index options, broader index price movements can have a significant impact on value, making it essential to align trading strategies with your financial goals and risk tolerance.

A key reminder about index options is that they are cash-settled, meaning no underlying asset is delivered at expiration. This simplifies settlement but increases the need for accurate predictions of index price movements. Index options, often tied to broad market indices, may also exhibit lower volatility than individual stocks or ETFs, potentially limiting gains but reducing risk exposure. While these features distinguish index options, the core risks—such as time decay, premium loss, and uncovered position exposure—are the same. Always review the Characteristics and Risks of Standardized Options disclosure document before trading to fully understand these complexities.

Unlike equity and ETF options, index options have some unique features that should be understood before investing in them. This includes, but is not limited to, settlement, exercise, expiration, tax, and cost characteristics. Indices are unmanaged, do not incur expenses, and cannot be invested in directly.

S&P 500 index options are among the most actively traded and liquid options contracts in the world. Listed on Cboe, they have a large number of strike prices and expiration dates to choose from. Due to their high notional values, they’re often the preferred vehicles for larger investors seeking to hedge stock portfolios. Traders also use SPX options to speculate on the next direction of the U.S. stock market and the large cap companies that dominate the S&P 500 index.