Yes, they are directional trades. It is profitable when you trade in the same direction than the SPX and when there is a big move. The strategy is not about using options, it is about being right in the right direction when SPX moves a lot. I use options because I want to have a real stop (when the option is at 0, no more risk) and because I want big leverage in case of a big move. During low volatility periods, I only make money three times a month in average. The rest of the month is composed of small losses and one or two 100% losses. Depending on market conditions, I trade between 10 and 15 days a month. I trade SPX for tax reasons (in the USA) and because it is cheaper than trading the SPY (I trade between 10 and 100 SPX options.. ) Any abnormal large spread will change the equation for me.
It's true that the bid/ask spread of SPX weeklies is always narrower than what you see on your screen. Same is true for the AM settled monthlies. However, if there is a major risk event, like a Fed rate decision, market makers will make you pay many times that nickel off the midpoint if you want to get out of your position. It's many times worse in the AM settled monthlies, even if you call your broker's block trading desk to get the actual inside spread. The actual width of the bid/ask spread is a nonlinear, increasing function of perceived risk and inventory of the market maker. It's the widest a second or so before the scheduled risk event actually occurs even if SPX doesn't move a tick.
Why are you guys using a product that isn't even open during the Asian session at all, does not have SPAN margning in any way, and has no pragmatic underlying from which to hedge (ES futures are a hedge but you're not getting margin offset through the exchange)? Sure, SPX options are twice as large as ES options - that's the *only* advantage if it really matters to you. Ask yourself what you'd rather have been in on from 8-21/2015-8/24/2015, ES options or SPX options.
If you're asking why use SPX vice ES FOPs, the big reason for me is that ES expires into the futures while SPX expires into cash. There are certainly strategies where avoiding that second set of commissions and spread by getting exactly the cash value at expiration is significant, plus you have to have a massive amount of margin available to take delivery of ES if all you want to do is trade a 5 point spread which unfortunately makes ES options effectively impractical for trading spreads that you will hold on expiration day. IB will autoliquidate even the day before expiration you if you don't have the cash to buy the full futures position, which is many times the max loss on a 5 point spread, and even more reasonable brokers will start calling you pretty urgently as you get close to the end of the day.
Compared to SPX options, I have found ES options to be: 1. Less liquid. The Asian session is the worst so not much of an advantage there. 2. Have higher commissions and exchange fees 3. More slippage since ES options trade in $0.25 increments as opposed to $0.05 To manage overnight risk, I prefer to reduce my position size and hedge before the close of the American session. I did just that in the week you mention above and did ok.
Since Monday, I don't see any unusual large spreads, except when there is a really big order which is expected. My guess is 1 day before to 1 day after Fed minutes, these larger spreads on the last trading day happen.