Understanding SPX Options: A Beginner’s Guide

Let’s begin by unmasking what SPX options are. Essentially, SPX is the ticker symbol for the S&P 500 Index, one of the most widely followed stock indices in the world. It’s a basket of 500 of the largest U.S. stocks, and it’s often used as a benchmark for the overall performance of the U.S. stock market.

Now, when we talk about SPX options, we’re talking about options contracts that use this S&P 500 Index as their underlying asset. Just like other options, an SPX option gives the holder the right, but not the obligation, to buy or sell the S&P 500 Index at a specific price before a certain date.

The Appeal of SPX Options

One might ask, “Why bother with SPX options?” Well, there are a few reasons that make them quite a catch:

  • Diversification: Since SPX options are based on the S&P 500 Index, they represent a broad market rather than a single stock. This can help spread out risk.
  • Tax benefits: SPX options qualify for a special tax rule that allows investors to treat 60% of any profits as long-term capital gains, regardless of how long the option was held.
  • Cash settlement: Unlike stock options, SPX options are settled in cash. That means you won’t end up with a bunch of stocks you weren’t planning on buying.

How SPX Options Work

Alright, let’s roll up our sleeves and get into the workings of SPX options. You might want to grab a cup of coffee for this part – don’t worry, I’ll wait.

Back with us? Great! Let’s get down to it.

SPX options are European style options. Now, don’t let the name fool you – it’s got nothing to do with where they’re traded. European style simply means the options can only be exercised on the expiration date, and not before.

This is quite different from American style options, which can be exercised any time before the expiration date. Don’t get these two mixed up – it’s like confusing your salsa with your samba!

Let’s look at a quick example. Let’s say you buy an SPX call option with a strike price of $3000, expiring in a month. If, at expiration, the S&P 500 Index is at $3050, your option is ‘in the money’ and you will receive the difference, $50, in cash.


Phew! That was quite a journey, wasn’t it? You’ve now got the lowdown on SPX options. Remember, like all investment tools, they come with their risks. But with a keen eye, a steady hand, and a pinch of daring, you can unlock their potential to diversify your portfolio and potentially gain some attractive returns.

Now that you’ve had a taste of SPX options, are you ready to dive deeper into the ocean of financial instruments? The choice is yours, financial explorer! Keep exploring, keep learning, and remember – fortune favors the bold!

That’s all from me. Until next time, happy trading!

Frequently Asked Questions (FAQs)

Can you buy options on SPX?

Yes, you certainly can buy options on the SPX. SPX options are traded on the Chicago Board Options Exchange (CBOE). Remember, SPX options are European style, meaning they can only be exercised at expiration.

Is SPY or SPX better for options?

Whether SPY or SPX is better for options trading depends on your investment goals and circumstances. SPY options are American style and are based on the SPY ETF that tracks the S&P 500, whereas SPX options are European style and are based directly on the S&P 500. SPX options have certain tax advantages and are cash-settled, while SPY options give you more flexibility as they can be exercised any time before expiration.

Who sells SPX options?

SPX options are sold by investors who want to earn a premium from selling the contracts. These could be individual traders or institutional investors. They assume the obligation to buy or sell the S&P 500 Index at the strike price if the option is exercised.

How big is a SPX option contract?

Each SPX option contract typically represents a right or obligation to buy or sell $100 times the Index. For example, if the S&P 500 Index is at 3000, one SPX option contract would represent a right or obligation to buy or sell $300,000 worth of the index.

Why can’t you trade SPX on Robinhood?

Robinhood currently does not support trading on SPX options. They do, however, support trading on SPY options, which track the same index.

Can you trade SPX on TD Ameritrade?

Yes, you can trade SPX options on TD Ameritrade. You’ll need to apply for options trading permissions within your account.

Is trading SPX risky?

All forms of trading involve risk, and trading SPX options is no exception. The value of options can fluctuate dramatically, and you may lose the entire amount you invested. However, risk can be managed with proper strategies, understanding of the product, and prudent decision-making.

How much is SPX taxed?

SPX options benefit from a special tax rule, the 60/40 rule. This means that 60% of any profits from trading SPX options are treated as long-term capital gains, regardless of how long the option was held. The remaining 40% are treated as short-term capital gains. Always consult with a tax professional for precise tax implications.

Do SPX options settle to cash?

Yes, SPX options are cash-settled. This means that instead of receiving the underlying asset (the S&P 500 index), the holder receives a cash payment.

Why can’t I buy SPX?

The S&P 500 Index (SPX) itself isn’t directly purchasable as it’s an index, not a security. However, you can buy SPX options or funds that track the S&P 500 Index, like the SPY ETF.

Can you buy SPX on Robinhood?

As of my knowledge cutoff in September 2021, Robinhood does not support trading on SPX options. They do, however, support trading on SPY options, which track the same index.

How early can you buy SPX options?

You can buy SPX options whenever the market is open. As of my knowledge cutoff in September 2021, the regular trading hours for SPX options on the CBOE are from 9:30 a.m. to 4:15 p.m. Eastern Time. Some SPX options also trade in extended hours.

Do SPX options expire worthless?

Like any option, an SPX option can expire worthless if it’s out-of-the-money at expiration. If the option is in-the-money, it will be automatically exercised at expiration, since SPX options are cash-settled.

What are the benefits of SPX options?

SPX options offer several benefits. They provide leverage, allowing you to control a large amount of the S&P 500 Index for a relatively small cost. They also offer strategic flexibility and potential tax benefits due to the 60/40 tax rule. Finally, they’re cash-settled, so there’s no need to worry about physical delivery of the underlying asset.

What is the average monthly return of the SPX?

The average monthly return of the SPX varies based on the time period considered. As of my knowledge cutoff in September 2021, the S&P 500 had an average annual return of around 7-10% when adjusted for inflation.

Can you buy and hold SPX?

You cannot directly buy and hold the S&P 500 Index (SPX). However, you can buy and hold funds that track the S&P 500, like the SPY ETF, or you can use SPX options as part of a longer-term investment strategy.

What is the best option strategy for SPX?

The best strategy for trading SPX options will depend on your investment goals, risk tolerance, and market view. Some popular strategies include covered calls, protective puts, straddles, strangles, and iron condors.

How do I buy S&P 500 put options?

To buy S&P 500 put options, you would first need an options-approved brokerage account. Then, you would select the put option with the strike price and expiration date that aligns with your investment strategy. Keep in mind, buying put options involves the risk of the entire premium paid if the option expires worthless.

Leave a Comment

Your email address will not be published. Required fields are marked *