Trading SPX Shares

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Mark,

Question on the SPX. Can one buy the SPX outright in place of buying SPY
ETF? Not the options but the SPX itself. If I wanted to allocate
$20,000 into the S&P 500 in a taxable account I could just buy 20
SPX contracts (assuming the SPX was at 1,000). If so, would this qualify
for that 60/40 tax treatment if sold at a gain even if the options aren't
used?

Ann

***

Hi Ann,

You cannot buy 'SPX' in the sense that you can buy shares.

The best you can do is buy an index fund that comes very close to mimicking the performance of SPX.  One such a fund is the Vanguard S&P 500.  You simply buy $20,000 worth of shares.  However, this is a (low fee) mutual fund, and not what you truly want to own.  It's nearly what you want, but so is SPY.

Yes, if you buy SPX calls, you get 60/40 tax treatment. 

But please (PLEASE) remember that when you buy calls you are not 'investing' in the index in the typical meaning of the word.  $20,000 worth of calls may expire worthless while SPX remains unchanged.  You apparently want to own shares – and that is VERY different from owning call options.  

If you can meet the margin requirement, and if your broker allows the trade, you can buy calls and sell puts.  The puts and calls must have the same strike price and expiration date.  That is exactly equivalent to owning shares, except they you do not collect any dividends.

The fact that you may be ale do this does not suggest it is a good idea.  You can easily lose the entire investment.

Let's look at ATM (at the money) options.  If you buy 2 SPX Oct 1070 calls and sell 2 SPC Oct 1070 puts, your would own a position that behaves the same as owning 200 shares, or $21,400 worth of a portfolio that is based on the S&P 500 Index.  This trade would cost a small cash debit (but a much larger margin requirement). 

At expiration, these cash-settled options would be worth the closing value of the index, and you would have a profit or loss based on owning 200 'shares' of SPX with a purchase price of $1,070 per share.

If SPX > 1,070, then you get the intrinsic value for your calls – in cash.  With SPX = 1100, the calls are in the money by 30 points each, and your account gets $6,000 in cash.  That's the profit you would have earned if you could buy 200 shares at $1,070 and sell them at $1,100.

If SPX < 1,070, your calls have no value, and you would have to pay cash because you are short the puts.  A closing price of 1020 means you would owe $10,000, and the value of your investment would be the remaining $10,000. 

When you own shares and it declines by 50 points, you lose 50 X $100 per point, per 100 shares. That's $5,000 per 100 shares, or $10,000.

Note:  If SPX declines by 100 points, you lose your entire investment.  Not only that, but as the value declined, you would get margin calls and possibly be forced to liquidate at an inconvenient time.

You did not state why you want to buy SPX 'shares' – but if it is to save commissions on buying SPY shares, that's not a good enough reason.

770


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5 Responses to Trading SPX Shares

  1. semuren 08/24/2010 at 5:04 AM #

    If one wants long (or short) exposure to the S&P 500 and the 60/40 tax treatment one can just trade the e-mini futures instead of SPY. Though given the leverage there that is not a good options for anyone who just learned of the product’s existence.

  2. rick forno 08/24/2010 at 6:41 AM #

    Agree with semuren: I trade the eminis (/ES, /TF, and others) regularly and in the case of the SPX e-mini (/ES) I find it far easier to work with it then the SPX. For me, there are some great benefits in using the e-mini as part of my investing and trading style, besides just the tax treatment.
    Although, I have begun to consider SPY as a way of setting up portfolio hedges that “go out” into the future, because I really don’t like holding e-mini trades overnight, let alone over months. (Exception being the /6E Euro futures short I had on earlier this year.)
    I’ve tried to work with /ES futures options, but they don’t seem to get filled on simple spreads as easily as the SPY.
    Remember too the SPX is pit-traded only, and only by the ‘pros’ at the CBOE….meaning not only are you lucky to get filled (and filled at your desired price) but the b/a spread generally is wide enough to drive a truck through. Never try a market order there!
    I find the SPX more annoying than useful. To wit — I’ve had orders sitting out there on the SPX for *hours* and despite seeing the price trade through my price several times on a 2- or 5- contract vertical, it never got filled.
    That said, I encourage folks to at least consider e-mini trading, but ONLY ONLY ONLY after a person does thier homework, understands them, their influences, behaviour, and knows the risks. Of course, that can apply to options or any trading instrument, too. 😉

  3. Mark Wolfinger 08/24/2010 at 11:07 AM #

    Semurin and Rick,
    Thanks for the contribution,
    I avoid e-minis for the simple reason that I am unfamiliar with them and unwilling to learn.
    If these arguments make anyone feel it’s worth the effort, go for it.

  4. Ann 08/24/2010 at 1:46 PM #

    I hold the SPY shares in half of my account and will sell out or buy back in based on extreme market conditions. Sold in late Jan, bought in late Feb, sold on last day of April, in cash since then. Was looking at being able to hold shares rather than options on this portion of my account with no defined time frame like options have. It is in a taxable account so just thought there might be the possibility of doing the same with SPX shares and reduce taxes on the gain of the sales.
    Thanks for explaining to me

  5. Mark Wolfinger 08/24/2010 at 3:42 PM #

    Ann,
    Glad to help.