There is no getting around this folks. SPY stock and SPY options combined make the S&P 500 Index ETF that greatest investing and trading vehicle in the world. There is no close second.
The most important concept in investing and trading is that we only invest and trade in assets with high liquidity.
The liquidity we are talking about is not water but the level of participation. The more participation there is, the more people compete for our orders. And the more people compete for our orders, the fairer the markets are and the better prices we receive at a faster rate. I dare you to find something that can look me in the eye and say that it not a giant edge.
The S&P 500 Index ETF is the greatest trading assets in the world, and as options traders, we need to almost always have positions on in SPY options. We will walk through everything that makes them so amazing right here.
How To Trade the S&P 500
For starters, the Standard and Poor’s 500 is the index that every manager pegs its performance to and every trader watches all day. The S&P 500 is so big that it encompasses 500 of the largest US based companies and captures about 80% of the available market capitalization. In short, it’s the one that people care about.
When you buy one of these “low-cost index funds” from the likes of Vanguard, you are buying a “low-cost” way of having direct exposure to the S&P 500 because you can’t get more diversified than that.
There are three direct ways to get immediate exposure to the S&P 500.
- S&P E-mini futures (/ES)
- S&P 500 Index (SPX)
- S&P 500 Index ETF (SPY)
All three of these ways to get immediate exposure to the index are liquid and legitimate trading vehicles. However, the first two come with some disadvantages.
For example, the S&P futures have a notional value of over $100,000 per contract and have an expected profit or loss of about $1,000 per contract per day. That is too big for most people.
The S&P 500 Index is a cash settled index which means there is no stock to trade. SPX options are incredibly liquid and trade large sizes, but the markets are very wide as the SPX is typically traded by only institutions and professional traders.
Luckily for every single person interested in the markets, the S&P 500 Index ETF has no downside at all as it is the highest volume stock and well as the highest volume options market for 1/10th of the cost of the other two options. Since we will always trade options over stock, let’s take a look at what make SPY options so incredible.
The Ultimate Guide to SPY Options
They are truly the greatest thing since sliced bread.
What makes them so amazing is that they are the purest form of efficient markets. When there is more demand for a product, the experience and barrier to entry continuously decrease.
Being the most liquid options market in the world, SPY options have some impressive stats. Let’s start from the top.
Since you are bragging so much about their level of participation, we better see some big time volume.
Big time volume numbers and they are helped by the Fed rate hike today. While this volume is greater than normal, it does come out to be $80,220,556,845 in notional value.
This crazy amount of volume needs to be fed. This much notional amount of money in SPY options demands more opportunity for them to exchange hands. We imagine SPY has many options expirations.
YUP. In fact, the S&P 500 Index ETF has so many options expirations cycles that most weeks they have three separate expirations. There is no other stock in the world that has this.
While there are many expiration cycles, because of the sheer competition for options contracts we imagine that the bid/ask spreads will be very small. The market makers want to cater to all of this money and treat them right. How do they look?
Here we can see that during the trading day, SPY options bid/ask spreads are no more than one to two pennies wide making the ability to be filled at mid price (fair market value) effortless and instant. This is a huge edge for investors and traders. For a $200+ stock, this is truly remarkable to have such small bid/ask spreads and as you imagined, no other $200+ stock has these types of options markets.
And since we said everyone pegs their performance against the S&P 500, we imagine there is a ton of money hedging against the price of SPY. If this were to be true, we would see a lot of open interest at every single strike.
Seeing volume in the thousands and open interest in the tens of thousands is truly remarkable when you think about the sheer amount of notional value those numbers represent.
We see some BIG numbers of open interest which is impressive at these contracts do not expire for another 38 days. Right now, there are 107,589 open options contracts for the $235 puts. That means that there is already (38 days before expiring) $2,548,783,410 bet on that strike price. WOW.
To give further proof that is it not just moms and pops trading SPY options, here are the five largest trades of the day today in SPY.
|Option||Quantity||Share Equivalent||Price||Cash||Notional Value|
|May 17 242 Call||38,000||3,800,000||$2.5o||$9,500,000||$908,010,000|
|Apr 17 242 Call||38,000||3,800,000||$1.07||$4,104,000||$908,010,000|
|Jan 18 199 Put||10,000||1,000,000||$3.66||$3,660,000||$238,950,000|
|Mar 17 243.5 Put||7,650||765,000||$0.09||$68,850||$182,796,750|
|Apr 17 216 Put||7,500||750,000||$0.26||$195,000||$179,212,500|
Again, these money managers feel it is totally fine to have single traded represent that much stock and that much money because they know they will be able to get filled at fair market value.
While SPY is increasing in share price, there is still the ability to do any type of trade we want. Daily we make as many covered and uncovered options trades as we can. Again, the reason for this is because we can get filled in an instant at fair market value for the exact price we want (and sometimes better).
Wrapping Up the Great SPY Options
This is it, ladies and gentlemen. If you aren’t interested in trading options (you should), you should still have your eyes glued to SPY. But if you are like us and know the value of trading options, you should always have positions on in SPY. If the market is up, we should have certain positions on and likewise, if the market is down, we should also have certain positions on. The reason for this is there is just so much competition for our orders and the amount of liquidity prevents SPY from having crazy less predictable moves.
There are NO downsides to trading SPY options and once you do, you will never go back.