Five S&P Options Trading Strategies

What is an S&P 500 Index option?

Good question.

S&P Index Options, or “SPX options,” are linked to the value of Standard and Poor’s 500. Similar to the Dow Jones Average, the S&P 500 is a weighted measure of stock market value. At any given time, the value of the option matches that of the S&P 500 Index. As a result, this is basically a way to trade against the overall market.

An SPX option is what is called a “European option,” meaning that it can only be exercised at or near the expiration date. This is as opposed to an American option, which typically allows investors to exercise the option at any point during the contract.

So, for investors who would like to take a look at SPX options, here are five quick-hit ways to make the S&P 500 part of your options portfolio.

Remember that you are trading against some of the market.

The S&P 500 is a weighted index of 500 companies on the stock market chosen as representative (and typically largest) members of their particular industries.

As a result, trading SPX options means that you are essentially trying to answer one question. Will the very top of the market go up in the near future or will it go down? What is good or bad for local hardware stores is not particularly relevant right here.

What you want to know is how the next 90 days will treat Home Depot.

Always be willing to sell the option.

Just because you cannot exercise the average SPX option early does not mean you cannot liquidate your position.

A European-style option can still be sold off. All you have to do is find a trader willing to buy the intact option from you in order to collect some early benefit from it.

Of course, this strategy requires some caution. Extrinsic value will kick in at this point and may heavily influence the sale price of the contract, but that does not mean this is a locked position.

Put options can mitigate a top-heavy portfolio.

There are many reasons to invest heavily in top-end companies. The firms that make up the S&P 500 are generally the ones that most would invest in if  given both the means and an opportunity.

Yet a portfolio too crowded with high-end stocks is vulnerable to shockwaves. Sudden interest rate changes, currency depreciation, or banking instability can all disproportionately affect the high-end businesses.

An SPX put option can help guard against that.

For investors who have sunk much of their portfolio into the success of big business, this can be an insurance policy that costs no more than contract premiums.

SPX options are a good source of diversified stability.

Diversity is one of the watchwords when it comes to retail investing, and an index option (like the SPX) has that in spades.

This is an option built specifically out of an entire bundle of underlying stocks. As a result, it is not going to swing wildly with any one company’s high performance or bad day. That makes this a good pick for portfolios looking to build in some stability.

Particularly for traders who have already sunk their risk capital into more heady investments, the SPX might just be a way to round that out.

SPX Weeklies can help short-term traders.

Finally, it is worth touching on a relatively unusual vehicle called the SPX Weekly. It is just what it sounds like: an S&P option that is settled at the end of each week.

For traders who want to move quickly, either because they have a short window of liquid assets or because their strategy revolves around high-volume trades, SPX Weeklies can be an effective asset.

It creates a position that long term traders can take advantage of between more significant positions, allowing them to use their money while researching the next move. Meanwhile, for day traders and scalpers, this is a way to sink money into a slightly more stable investment without losing control of it for months at a time.

Now that you know how  SPX options can work for you, take a look at our trading products designed to help you get your hands on them, as well as our trading rooms where you can watch trades happen in real-time.