This complimentary article from Options Profits was originally published on February 8 at 8: Don't risk missing over 40 options trade ideas every week and exclusive commentary from over 10 experts.

Click here for more information and a Day Free Trial. Russell Rhoads is an instructor with The Options Institute at the Chicago Board Options Exchange.

He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In he wrote Candlestick Charting For Dummies and is the author of Option Spread Trading: A Comprehensive Guide to Strategies and Tactics.

Russell also wrote Trading VIX Derivatives: Trading and Hedging Strategies using VIX Futures, Options and Exchange-Traded Notes. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois - Chicago and acts as an instructor for the Options Industry Council. The Chicago Board Options Exchange CBOE has been the venue for trading SPX options since the early s, but those options are traded in an open outcry format.

This differs from the process for SPX options which is AM settled. This exchange traded fund is most commonly referred to by its ticker SPY. A comparison of options on SPXPM versus options on the SPY appears in the table below:. Stalk reasons to buy the dip rather than sell the market short and gamble. Keep your biases in check and avoid making predictions. Doug Kass shares his thoughts on Apple, Google and Starbucks. First time in a while to have more new lows than highs.

A comparison of options on SPXPM versus options on the SPY appears in the table below: SPXPM option contracts are European style which means they may only be exercised at expiration. This is not true with SPY option contracts. Options on the SPY are American style, like all equity options that trade in the United States, which means there is always the possibility of early assignment if a short position is held in an SPY option. Upon settlement SPXPM option contracts will result in receiving or paying cash if an option is in the money at expiration.

Settlement for SPY options results in a transaction in shares of the SPY exchange traded fund Finally, at CBOE, SPY options trade in a hybrid format where open outcry or electronic trades may be executed. Both are traded with slightly different market models, but both may be executed with the click of a mouse.

One of the ways you may have chosen to trade this outlook would be by purchasing call options that have an underlying that is tied to the direction of the overall stock market.

Two choices may be SPY or SPXPM call options that expired on January 21, These are good comparable instruments as both are settled based on the closing prices of their respective markets on the third Friday of the month. Let's assume we execute our trades just before the market closed on the last day of The result of this may be higher commissions if you have to pay a per contract commission to execute the trade.

This will vary from broker to broker so you should check directly with your broker to determine what the commission difference may be. Let's fast forward to the close of the market on January However, there are differences when you look at how you go about pocketing this profit. However, the intent of this trade was to profit from a short-term price move. If your intent was a short-term profit then you would need to exit your option position by selling your 10 SPY January calls in the open market.

The process for taking cash profits in an SPXPM option contract is a little different. Index options are cash settled instruments. In the case of owning 1 SPXPM call, you can just hold the contract through expiration and the result is a cash payment of the intrinsic value of the option. No trading action is necessary. Another big difference is the potential tax implication of these trades.

With respect to the SPY option position, the taxation of options on exchange traded fund shares where the underlying portfolio or index is broad based is currently uncertain and requires guidance from the IRS.

So if you have a stock market outlook and are thinking of putting on an SPY option trade you may want to check out SPXPM options as an alternative. SPXPM options may be executed with the click of a mouse just like SPY options. A single SPXPM option should give you about ten times the market exposure as a comparable SPY option contract. Also, if the goal is to hold an option through expiration, the cash settlement process may be easier than executing a sell order in SPY options.

Finally, depending on your personal situation, there may be a tax benefit to trading SPXPM options versus SPY options.

CBOE Special Feature: SPXPM vs. SPY Options - TheStreet

Additional resources to compliment the article: Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker, by calling OPTIONS, or from The Options Clearing Corporation at www. Commissions, fees, margin interest and taxes have not been included in the examples used in this article.

These costs will impact the outcome of all transactions and must be considered prior to entering into any transactions. Investors should consult with their tax advisors to determine how the profit and loss on any particular option strategy will be taxed. Tax laws and regulations change from time to time and may be subject to varying interpretations. C2, C2 Options Exchange and SPXpm are service marks of C2 Options Exchange, Incorporated C2.

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Subscribe Access insights and guidance from our Wall Street pros. Find the product that's right for you. SPY Options Jill Malandrino. Feb 9, All These Ups and Downs Can Get to You Stalk reasons to buy the dip rather than sell the market short and gamble.

Jun 21, 7: Stick With the Numbers on the Screen Keep your biases in check and avoid making predictions.

Jun 20, 7: All the Rallying Big Bank Stocks Look Very Risky, Doug Kass Says Doug Kass shares his thoughts on Apple, Google and Starbucks.

Jun 19, 8: Dip Buyers Rescue Market Again, but Where's the Leadership? Jun 15, 4: Stock Futures Down Slightly Even as Crude Oil Turns Higher. Walmart to Tech Industry: Get Off Amazon's Cloud, Or Else.

Understanding differences of SPY vs. SPX

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