Greetings, I am delighted to join this forum and am looking forward to acquiring new knowledge and insights from this community. A brief introduction about my background: I have been actively engaged in day trading the E-mini S&P500 since 2012 and am a holder of the CME IOM membership. My primary motivation for day trading stems from the desire to mitigate the risk associated with holding positions overnight, which can lead to vulnerabilities if the market moves adversely against my positions. Recently, I have been exploring the strategy of using options as a risk management tool, specifically through purchasing call options for going long and put options for going short. This approach seems ideally suited to my objectives, as it inherently limits my potential loss to the initial investment, given that I am not engaging in selling options. With this context, I have two inquiries for which I would greatly value the forum's expertise and perspectives: Options Trading Volume: SPY vs. SPX vs. ES I am deliberating whether to focus my trading activities on SPY options over SPX or ES options. Based on my observations, SPY options tend to have tighter spreads, which I find advantageous. However, this preference precludes the benefits of Section 1256 tax treatment. Given the tax implications—specifically, the choice between a higher tax rate of 37% versus a reduced 24% under Section 1256—it seems the cost savings from narrower spreads on SPY trades might outweigh the tax benefits. Would you advise trading SPY over SPX or ES under these circumstances, considering the potential for an additional 13% tax burden? Selecting SPY Call Options Given the broader range of strike prices and expiration dates, assuming SPY as the preferred instrument, I am strategizing for a specific scenario where I anticipate a $5 uptrend in SPY by 9 AM PST the next day. With the market closing at 1 PM PST today, and making the decision at 12:30 PM PST, which among the following SPY call options would you recommend as the most judicious choice? a. An option expiring tomorrow, priced at $5 b. An option expiring tomorrow, priced at $1 c. An option expiring in three days, priced at $10 d. An option expiring in seven days, priced at $20 Or is there another option that might be more appropriate under these conditions? Your insights and opinions on these matters would be immensely appreciated. Thank you for your time and consideration.
A comment regarding "Based on my observations, SPY options tend to have tighter spreads, ...". If your trading size is large enough, look again at the spreads on the strikes you will use. AKA, a 2 cent spread in SPY would be comparable to a 20 cent spread in SPX for apples to apples. You may find SPX provides adequate spreads, and is "cleaner" to use due to European style, cash settled, and no early assignment risk, as well as 1256, and lower overall commissions. If you have statistically accurate projections for these moves, you can construct option structures to maximize your risk adjusted returns. (I have not seen anyone able to reliably predict with precision, so this may be pissing into the wind)
SPY has tight (penny wide spreads) because it is fairly valued. Biggest firms in the world MM in it or use it elsewhere. Probably better to use SPY as a fair value engine and then trade a less liquid but correlated chain to gain some edge.
Thanks for your reply, Understanding the intricacies of options contracts is essential. It appears that SPX contracts carry a tenfold value compared to SPY contracts. Therefore, while SPY experiences a daily volume of 10 million, SPX's volume of 3 million equates to roughly 30 million in SPY volume, if my understanding is accurate. I find SPX to be the optimal choice for my needs. However, I am curious about the prevalence of SPY trading over SPX within the market. In your professional opinion, what factors contribute to this preference, considering SPX's apparent advantages as a more robust instrument? Also is there any advantage of trading ES option? I have an IOM membership perhaps I can get some discount on fees.
I am only a retail trader learning as I go. Except for the smaller size, not clear to me why SPY has so much interest. Having to deal with early assignment is annoying, if you are managing your cash near zero. I do not trade ES or ES options. For me the commissions are excessive and the product is only half the size of SPX. However, I think some brokers may allow span margin (for futures and futures options) in in IRA account, which could make it very attractive and superior to SPX trading in an IRA without margin. <-- verify as I have no first hand experience with this.