Why I love trading SPX options contracts
Read to learn the dangers and opportunities
Trading SPX options is an amazing but dangerous way to tradethe stock market. Here are some reasons why I trade SPX options:
Liquidity: SPX options are highly liquid, which means that I can easily buy and sell them at any time. This makes it easy to enter and exit trades quickly. More importantly my dream is to build a fund that can support $100 million in capital. SPX would not have a problem absorbing $1 to $5m in volume daily.
Tax advantages: SPX options are section 1256 contracts, which means that they are taxed at a lower rate than other types of options. This can save you money on taxes. This is less of an benefit for me now that I’m a PR resident under the investor program.
Cash settlement: SPX options are settled in cash, which means that I don't have to worry about taking delivery of the underlying asset. I can’t stress this enough. How many times have you been in SPY contracts and the broker starts closing the position out during last hour? They do this to manage risk. Very understandable! with SPX the risk is mitigated due to cash settlement and they let me ride these into close.
Leverage: SPX options offer built-in leverage, which means that I can control a large amount of stock with a relatively small investment. I’ve been able to buy 10 contracts for as little as 0.20 or $200 and sell for over $2 or $2k! sometimes as much at $5k
Flexibility: SPX options now trade with daily expirations. So I can choose a variety of structures from same day to weeks or a couple of days out with out having to pay more premium than I want.
Dangers
So what are the dangers?
Volatility - the contracts can change price fast! and one because of the “cheapness” one can end up sizing too much and once you are on the wrong side, these can bleed out quickly. I’ve had trades where I buy at 3 thinking it goes to 6+ where it drops to 1 stopping me out and then goes to 7.
Premium - Theta and IV has a large impact on pricing and once decay sets in…
Overall SPX is a great way to make significant money, but you have to learn how it moves and timing is crucial.