SPY and $XSP

Has anyone ever held a long stock position in SPY and hedged it with $XSP options, e.g., a short call, or a long put, or both?

I get the fact that it is not a perfect hedge, because $XSP options are cash-settled. And $XSP is a mathematical construct that is exactly one tenth of $SPX, except for some very minor differences due to rounding. SPY is not one tenth of $SPX. It is something else. There is always a small but mathematically significant difference between the value of SPY and the value of $XSP, and it is not due to rounding. It has to do with how SPY handles dividends. It is technically tracking error in SPY.

And in a retail account, the broker will treat a short $XSP call as a naked short for margin calculations. Even if you are long SPY, it's not a covered call. $XSP is an index option, so it is impossible to be long the underlying security.

I get all that.

However, if you can handle the margin requirement, it feels like it would be a viable hedging strategy, that some might like to use instead of SPY options, because, among other things, it eliminates the possibility of early assignment.

Any thoughts on this?

 

I trade spx options against my spy position exclusively. The 1256 treatment is the primary reason.

 

It is McDonald’s vs Burger King, same sh*t.

 

$XSP and SPY are both members of the S&P 500 Index basket, so 100% offset.

 

Doesn't work that way in our Schwab account LOL

Maybe it works if you have portfolio margin

 

Yes, that's with PM but I assume all more serious retail traders have that.