spx vs spy presented by cboe....take your trading to the next level!

Trading SPX Options vs SPY Options:Trading Advantages and Strategies

February 26, 2013Presented by Peter B. Lusk@PeterLusk

Stein + Partners

CBOE OPTIONS INSTITUTE 2

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Disclosures

In order to simplify the computations, commissions have not been included in the examples used in these materials. Commission costs w ill impact the outcome of all stock and options transactions and must be consider ed prior to entering into any transactions. Multiple-leg strategies involve multip le commission charges.

Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purpo ses only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities.

Options involve risks and are not suitable for all investors. Prior to buying or selling an option, an investor must receive a copy of Chara cteristics and Risks of Standardized Options. Copies are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Driv e, Suite 500, Chicago, Illinois 60606. Investors considering options should consult their tax advisor as to how taxes may affect the outcome of contemplated options tran sactions.

CBOE and Chicago Board Options Exchange are registe red trademarks and The Options Institute is a servicemark of CBOE. All othe r trademarks and servicemarks are the property of their respective owners.

This presentation should not be construed as an end orsement or an indication by CBOE of the value of any non-CBOE product or service des cribed in this presentation.

Copyright © 2013 Chicago Board Options Exchange, In corporated. All rights reserved.


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Presentation Outline

• Mechanics of Index Options• SPX Specifications• SPX versus SPY• Protecting a Diversified Portfolio• Option Price Behavior• Strategies• Summary


Mechanics of Index Options

Index Option Contract

Index options function very much like stock optionsBoth calls and puts are available for tradingThere are three major differences: • Index options are settled through a cash transfer• The majority of index options are European style

contracts• A potential tax benefit exists for index option traders


Index Options vs. ETF Options

Stock options and ETF options are similar –

Index Options are different –

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• The Underlying is 100 Shares• Exercise/Assignment: Buy/Sell Shares

• The underlying is a cash value• Exercise/Assignment: Receive/Pay Cash


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Index Options – $100 Multiplier

The dollar cost of an index option is:

$100 times the stated option price

SPX 1500 Call @ 37.00

Price of Option = $100 x 37 = $3,700


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The Cash Settlement Process

Example: SPX is 1538.53 at expiration

Cash Value of a 1500 Call?SPX Value 1538.53Less Strike Price 1500Difference 38.53x Multiplier x $100Cash from Seller to Buyer $3853.00


Mechanics of Index Options

Index vs. Equity Option Exercise Style

American Style Stock and ETF OptionsCan be exercised on any business day

European StyleMost Index Options (SPX)Can only be exercised at expiration


Index Options - SPX

Ticker Symbol SPXUnderlying S&P 500 Stock IndexMultiplier $100Exercise Style EuropeanSettlement AMFull Contract Size 10 x SPYTax Treatment 60 -40 (Broad -based index)

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60-40 Tax Treatment

1256 Contracts:• Profits treated as 60% long term / 40%

short term regardless of holding period• Reported on Form 6781 and Schedule D• Year end prices become cost basis for

the new year

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Index Options

Tax Advantage

ETF Options

Broad Based Index Options

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*Consult your tax advisor

**According to Taxes and Investing, published by The Options Industry Council,

available from http://www.cboe.com/LearnCenter/RCGeneral.asp

Note: IRS regulations may change. Seek professional tax advice.

• Are treated like stock options*

• Receive 60-40 Tax Treatment**• 1256 Contracts


Index Options

Broad Based Index Options include:• S&P 100 – OEX, XEO• S&P 500 – SPX, SPXpm , XSP• CBOE Volatility Index - VIX

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SPX Comparison to SPY

Contract Comparison

SPY is the SPDR S&P 500 ETF which represents ownership in a portfolio of stocks that replicates the S&P 500 Index.The underlying pricing for both SPX and SPY options is the S&P 500 Index

December 2012 Volume102,750,000 SPY Options

30,300,000 SPX Options



Size Comparison

S&P 500 at 1450.00

1 SPY Option = 145.00 x 100 = $14,500

1 SPX Option = 1450.00 x $100 = $145,000

To control the same amount of market value10 SPY contracts need to be traded for each SPX con tract



Size in Context

December Volume & S&P 500 at 1450.00:

SPY – 102,750,000 x 145.00 =$14,898,750,000 of market value

SPX – 30,300,000 x 1450.00 = $43,935,000,000 of market value

SPX is a much bigger market



Contract Comparison Summary

S&P 500 at 1450.00

SPY SPXUnderlying Value 145.00 1450.00Contract Underlying 100 Shares $100.00 American / European American Style European StyleAM / PM Style PM Both AvailableSettlement Buy / Sell Shares Pay / Receive Cash


Why SPX Options?

•Larger notional side – lower potential commissions (10 to 1 ratio)

•Convenience of cash settled options versus physical delivery of shares

•No potential early exercise issues with SPX•Preferred choice of sophisticated institutional

traders•Potential tax benefit


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Protecting a Diversified Portfolio

• You own a $300,000 portfolio that closely follows the SPX now at 1520

• You are worried about a 15-20% market decline in the next 3 months.

• You want to limit downside risk and keep the upside.


Protecting a Diversified Portfolio

Determine # of SPX contracts:

Portfolio $Value to be HedgedNotional Value of Index Contract (Strike x $100)

$300,0001520 x $100

Buy 2 SPX June 1520 Puts @ $40.00 ($4,000/Contract)

2 SPX Puts=


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Buying Index Puts

SPX @ 1520

Buy____ SPX ________ Puts @ ______

Cost = __________________________2 x 40 x $100 = $8,000≈≈≈≈ 2.6% of portfolio value

1 SPX Put protects $152,000

2 June 1520

Strike price is at the money

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# of options = $300,000 ÷÷÷÷ $152,000 ≈≈≈≈ 2

$300,000 Portfolio


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How the Protection Works

• Assume SPX at 1,216

• Market is down 20% so portfolio is down 20%

• $292,000 stock portfolio now $233,600

• With SPX @ 1,216 1520 Puts @ _______

• Value of puts = _________________________

• Total Portfolio = ________________________

304.00

304.00 x 2 x $100 = $60,800

233,600 + 60,800 = 294,400

Market down 20%. You are down 2%


Unwilling to Pay for Puts?

Sell equity calls to pay for index puts

• Sell near-the-money calls on stocks that you are willing to sell now.

• Sell out-of-the-money calls on stocks that you are willing to sell if price rises.

• Sell calls on part of a stock position if you want to “lighten up” or diversify .


More SPX & SPY Differences

• SPY commission 20 contracts in and outSPX commissions 2 contracts in and out

• Tax consequences on put gain:SPX 1256 (60/40) SPY tax status uncertain

• SPY position turns into SPY shares if not closed, SPX settle in cash

Option Price Behavior


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Delta: The amount an option’s theoretical price will change for a corresponding one-unit (point) change in the price of the underlying security. Gamma: The amount an option’s theoretical delta will change for a corresponding one-unit (point) change in the price of the underlying security.Theta: The amount an option’s theoretical price will change for a corresponding one-unit (day) change in the days to expiration of the option contract.Vega: The amount an option’s theoretical price will change for a corresponding one-unit (point) change in the implied volatility of the option contract.


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Factors Impacting an Option Price:

Stock Price

Strike Price

Days to Expiration

Interest Rates

Dividends

Implied Volatility

Long SPX Call


Long Call – Example

•S&P 500 quoted at 1450.00•We have a bullish outlook over the next two months

and expect market to rally 10% to 1600.00 by quarte rend

•SPXQ options expire on last day of March •To trade this positive outlook for the S&P 500 we

decide to buy a call option

Buy 1 SPXQ Mar 1500 Call at 15.00


Long Call

Long 1 SPXQ Mar 1500 Call

Payoff Table

SPX at Expiration

SPXQ Mar 1500 Call Call Premium Profit / Loss

140014251450147515001525155015751600

(15.00)(15.00)(15.00)(15.00)(15.00)(15.00)(15.00)(15.00)(15.00)

(15.00)(15.00)(15.00)(15.00)(15.00)10.00 35.00 60.00 85.00

0.00 0.00 0.00 0.00 0.00 25.00 50.00 75.00

100.00


Long Call

Long 1 SPXQ Mar 1500 Call

Payoff Diagram

Break Even1515.00+4.4%

Market at1450.00 Target is

1600.00

SPX Debit Spread


Debit Spread

SPX Bull Call Spread: • S&P 500 at 1320• Bullish on the stock market for next

two months – expect SPX at 1350• Focus on April expiration

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Debit Spread

SPX at 1320 58 Days to April Expiration

SPX Bull Call Spread –Buy 1 SPX Apr 1320 Call @ 31.00Sell 1 SPX Apr 1350 Call @ 16.00

Net Debit = 15.00

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Debit Spread

Long 1 SPX Apr 1320 Call @ 31.00Short 1 SPX Apr 1350 Call @ 16.00

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1320 & 1350 CallsExpire OTM

1320 & 1350 CallsExpire OTM

1320 Call ITM1350 Call OTM1320 Call ITM1350 Call OTM1320 & 1350 CallsBoth ITM

1320 & 1350 CallsBoth ITM

SPX Credit Spread


Credit Spread

Index Option Monthly Income Strategy• Credit spread using OOM options• Low dollar reward relative to risk

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SPX Credit Spread with Calls

SPX at 1460

Sell 1 Apr 1490 Call 1.45

Buy 1 Apr 1500 Call (.45 )

Net Credit 1.00

(45 Days to Expiration)


SPX Credit Spread with Calls

Current

Market

Current

Market

Max Loss = -9.00Max Loss = -9.00


Credit Spreads

Credit Spreads Monthly Income Strategy

Positives: • Collect premium with limited risk• Near zero exposure to volatility Negatives: • Less return relative to naked short

option trades

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Summary

SPX Options are an excellent method of gaining exposure to the S&P 500 IndexSPX Index options get 60/40 tax treatmentThree part forecast needed for option trades: – underlying / time / implied volSpreads offer unique trade-off

www.cboe.com/spx


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CBOE400 South LaSalle StreetChicago, Illinois 60605

Questions: @PeterLusk

spx vs spy presented by cboe....take your trading to the next level!

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