The INDEXSP:.INX is nothing more than the S&P 500 Index. Known as the Standard & Poor’s 500 and created in 1923, the S&P is an American stock market index comprised of 500 of the largest companies listed on either the New York Stock Exchange or the NASDAQ. This index, like all other indexes, is capitalization-weighted, meaning the price of the index is created by the total weight of all 500 stocks. Here is the current breakdown of this index.
This type of wide blend of sectors allows the INDEXSP:.INX to be the best gauge for the stock market on a daily basis, making it the index that every fund compares its performance to, and the index that all professionals watch day in and day out.
With all the attention on the S&P 500 Index, are there any good ways to trade and invest in it directly? Unfortunately, INDEXSP:.INX is not a tradable symbol. However, there are three main ways to trade an S&P 500 product and we will spend the rest of this article going through all of them and speak about which ones are right for you.
S&P 500 Emini Futures
The S&P 500 futures just happen to be the most active futures in the world and are the first way we can have pretty much direct exposure to the S&P 500. But what are futures?
Futures are leveraged product that trades during Globex hours from Sunday at 6 pm est to Friday at 5 pm est with only 4:15 pm to 4:30 pm being their time off in between. These futures contracts, and especially the Emini S&P futures, attract mountains and mountains of liquidity. How much liquidity might you ask?
Well, for starters, the S&P futures are quite a large product.
Each point has a $50 multiplier and with four ticks (smallest distance between two prices) in a point, each tick is worth $12.50. If each point is worth $50 and the current price of these futures is $2368.25 we have a total notional value of one S&P 500 futures contract of $118,412.50 or (2368*50) + (12.5*1). Quite large for just one contract.
On top of this, these futures contracts trade big time volume. Friday saw the S&P futures trade 1,848,310 contracts. If we take the total notional size of one contract ($118,412.50) and we multiply it by the number of contracts traded (1,848,310) we get the total notional value of the Emini market on Friday. That number comes out to $218,863,007,875. More than big boy numbers. And with the bid and the ask being never more than one tick wide, the futures contracts themselves can be seen as incredibly liquid.
On top of this, the Emini S&P futures, which are our first way of getting direct exposure to the INDEXSP:.INX, have many different expiration cycles,
have a ton of volume,
and have options markets that are never larger than a few ticks wide during US trading hours.
There is a downside, however. With these futures being such large contracts, the expected profit and loss for just one day and one contract can be a lot larger than people are comfortable with. Right now with the current daily expected move the Emini’s being 0.75%, one can expect to make or lose somewhere between up or down $900 a day. And this number only gets larger as volatility picks up (we are in a time of puny volatility).
For non-experienced traders or those who do not have a few hundred thousand dollars in their accounts, we do not recommend getting involved with the S&P futures to get exposure to the INDEXSP:.INX.
However, if you are an experienced trader and have the proper capital, the S&P 500 futures allow the world to be your oyster.
- Markets are never wider than one tick at a time
- You can get filled at any size you want at the blink of an eye
- The options markets allow for proper hedging and improvements because of their superior liquidity
If the futures don’t work for you, maybe we can make you feel more comfortable with the $SPX.
Since we can’t trade INDEXSP:.INX, maybe we can give the $SPX a shot?
We are going to jump right in folks. We are going to hit you with the news right off the bat. The $SPX is a cash settled index, which means there is no stock to trade. But what?
The $SPX is an index. To explain what this whole cash settled business is, we can use an example with trading $SPX options. If we sell an option in the $SPX and it expires in the money…what will happen? Most people will say, “you are assigned stock”. But that is not the case here…remember…there is no stock. So when that option we sold expires in the money, rather than settling that contract to stock, it gets settled with cash. The cash equivalent of what we lost on the short in the money option is taken from our account.
But have no fear! Just because we don’t have $SPX stock to trade…
doesn’t mean it’s the end of the world. Remember, the INDEXSP:.INX is what every money manager in the world watches all day. Surely their options markets are awesome…right?
You would be right! Let’s start with volume…
HELLO. Over one million options contracts traded in a day for any stock would be ginormous…let alone a big $2372.60 index. How much exchanged hands on the options market in the $SPX on Friday? Well, there is no multiplier on the price of the $SPX because it settles to cash so we just take the price ($2372.60) and multiply it by the number of contracts traded (1,114,490) and we get a total notional value of $2,644,238,974.
What about their options markets? This is a pretty big index. Do they have a bunch of expirations?
I guess you can say that. What about their markets?
We see enough volume and open interest here to feed an entire country 🙂
While these markets are wider than we are usually comfortable with, the amount of liquidity and participation in this product allows us to get filled only a few pennies off of midprice on any options trade.
We do not recommend trading uncovered options in the $SPX unless you have a portfolio margin account.
If you do not have one of these accounts, the margin requirements are too large for any man or woman on this planet. However, we recommend to anyone to trade as many covered options as they can get their hands on as covered options come with defined risk, so the fact that this is a giant product is less risky.
The $SPX is an excellent replacement for trading INDEXSP:.INX for people who are interested in options. Unfortunately again, the $SPX does not have any stock to trade.
Let’s see what our third option is…
The S&P 500 Index ETF $SPY
Coming in third (but not least) on our list of INDEXSP:.INX replacements is the $SPY. $SPY is the highest volume stock in the world.
Let’s get right to it.
$SPY on Friday traded a grand total of
shares. And with a current price of $237.69, the total notional value of stock traded two days ago was $19,488,595,764. Again, this is the highest volume stock (ETF) in the world. With volume like this, the bid/ask spread of $SPY is never more than one penny wide during US trading hours.
The options markets may actually be even better.
We can see just sensational volume.
For a total notional value of $65,251,015,335 exchanged on Friday. Wow. Even better, we can trade whenever we want
at any price we want.
This post is being done a weekend so the bid/ask spreads have widened up however, during normal trading hours, these markets will never be more than one penny wide. And we see enormous volume and open interest at every strike. Truly amazing.
We recommend trading $SPY as a substitute for trading INDEXSP:.INX for ANYONE.
This product is not too big. It doesn’t not have stock to trade. It has everything you could ever want in a product. This is the reason why the S&P 500 Index ETF is the highest volume stock in the world and trades the most options in the world on any given day.
What Do We Do Now With INDEXSP:.INX?
Again, here are the three options:
- S&P Futures
Here are the pros and cons to each:
It looks like we have a clear winner. Want exposure to INDEXSP:.INX? Trade the S&P 500 Index ETF…$SPY.
Next, check out exactly how far the S&P can move over the next year!