Here Come the Nanos

HERE COME THE NANOS

SUMMARY

As a beginner in options trading, I’ve found that risking $400,000 for each trade can be quite intimidating. Thankfully, there are more affordable alternatives like MINI options, which provide full trading rights at a fraction of the cost. In this article, I explore various ways to trade the S&P 500 index, including standard SPX options, mini-SPX (XSP) options, SPY and IVV ETFs, and the newly introduced Nanos S&P 500 index options. Each of these products has its advantages and drawbacks, but the main takeaway is that Nanos options offer the lowest cost entry point for those looking to practice and learn options trading at just 1/1000th of the price per trade.

But I regress. Let’s start at the top of the food chain, SPX.

SPX – S&P 500 Index  ($412,000/option trade)

The S&P 500 Index, commonly abbreviated as SPX, is a market-capitalization-weighted index of the 500 leading publicly traded companies in the United States. It is widely considered one of the best representations of the U.S. stock market and a reliable indicator of overall U.S. economic health. The index is maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global.

Here are some key aspects of the S&P 500 Index:

While you cannot directly invest in or buy the S&P 500 Index (SPX) itself, you can trade options on the SPX. Options on the S&P 500 are cash-settled index options, which means that upon exercise, the holder receives a cash payment rather than shares of an underlying stock. These options are European-style, meaning they can only be exercised on the expiration date, not before.

Like most options, SPX options trade in multiples of 100. As of 4/11/2023, the value of the SPX is 4,120. This means, that a one-lot option trade of the SPX (100 multiplier) would have a notional value of 100 * $4,120 or $412,000!

You don’t need to have the full notional value of the contract. Instead, you need to have enough money in your account to cover the margin requirement set by your broker. The margin requirement for selling a put option is usually a percentage of the notional value of the contract, determined by the broker’s margin policies and regulatory requirements.

The margin requirement for selling a put option varies by broker and the specific option’s characteristics, such as its strike price and time to expiration. Generally, the margin requirement for selling cash-settled index options ranges from 10% to 20% of the notional value. However, it’s essential to check with your broker to determine the exact margin requirement for the specific put option you wish to sell.

For example, if your broker requires a 15% margin to sell an SPX put option, you would need:

$412,000 (notional value) x 0.15 (15% margin requirement) = $61,800

In this example, you would need $61,800 in your account to sell one SPX put option, not including commission fees.

Even $61,800 is WAY too much money for most of us mere mortals. Luckily, there are many other ways of trading the S&P 500.

 SPY and the IVV  ($41,200/option trade)

The SPDR S&P 500 ETF Trust (SPY) and the iShares Core S&P 500 ETF (IVV) are both exchange-traded funds (ETFs) designed to track the performance of the S&P 500 Index. These ETFs allow investors to gain exposure to the U.S. stock market by investing in a single fund that represents a basket of the 500 largest publicly traded U.S. companies.

  1. SPDR S&P 500 ETF Trust (SPY):
  2. Launched in 1993 by State Street Global Advisors, the SPY is the first and most well-known ETF tracking the S&P 500 Index.
  3. SPY is structured as a Unit Investment Trust (UIT), which means that it has a more rigid structure compared to other ETFs. UITs are required to fully replicate the underlying index and cannot engage in activities such as securities lending, reinvesting dividends, or holding cash.
  4. SPY’s expense ratio is 0.0945%, which is the annual fee charged to investors for managing the fund.
  5. SPY pays dividends quarterly and has an attractive dividend yield.
  6. The ETF is widely used by institutional and individual investors, as well as traders, due to its high liquidity and tight bid-ask spreads.

SPX Options vs SPY Options

SPX options and SPY options are both options contracts that derive their value from the S&P 500 Index, but there are some key differences between the two. Here’s a comparison of SPX and SPY options:

Key differences between SPX and SPY options:

  1. Underlying: SPX options are based on the S&P 500 Index itself, while SPY options are based on the SPDR S&P 500 ETF, which tracks the index.
  2. Type: SPX options are index options, while SPY options are equity options.
  3. Settlement: SPX options are cash-settled, meaning that the option holder receives a cash payment upon exercise. SPY options are physically settled, meaning that the option holder receives shares of the SPY ETF upon exercise.
  4. Style: SPX options are European style, which means they can only be exercised at the expiration date. SPY options are American style, which means they can be exercised at any time before the expiration date.
  5. Contract Size: SPX options have a larger contract size based on the S&P 500 Index level multiplied by the contract multiplier (100). SPY options have a smaller contract size based on the SPY share price multiplied by the contract multiplier (100).
  6. Tax Treatment (for U.S. investors): The tax treatment of gains and losses from SPX options is different from that of SPY options. SPX options are treated as Section 1256 contracts, with gains and losses taxed at a blended rate of 60% long-term and 40% short-term capital gains. In contrast, gains and losses from SPY options are subject to short-term or long-term capital gains tax, depending on the holding period.

Traders and investors may choose between SPX and SPY options based on their preferences for contract size, settlement, exercise style, and tax treatment. SPX options may be more suitable for large-scale traders and investors seeking cash settlement and favorable tax treatment, while SPY options may be more appropriate for smaller-scale traders and those who prefer the flexibility of American-style options.

XSP A SMALLER SPX ($41,200/option trade)

The Cboe S&P 500 Mini Index Options (XSP) are index options designed to track the performance of the S&P 500 Index at 1/10th of the contract size of the standard SPX options. XSP options provide investors with a more accessible and cost-effective way to gain exposure to the S&P 500 Index through options trading. These options can be used for hedging, speculation, or income generation, just like standard index options.

Here are the key features of XSP options:

$412 (mini-index level) x 100 (multiplier) = $41,200

XSP options provide a more affordable alternative to SPX options for investors looking to gain exposure to the S&P 500 Index through options trading. The smaller contract size makes it more accessible for individual investors and those with smaller portfolios. However, liquidity and trading volume may be lower compared to SPX options, potentially leading to wider bid-ask spreads.

INTRODUCING THE NANOS ($410/OPTION TRADE)

The mini-spx (XSP) detailed above is 1/10th the size of the SPX. It still trades in blocks of 100, but the price is 1/10th the price of SPX. The NANOS were introduced by CBOE in February 2022. These little darlings are 1/100th the size of XSP. Essentially, you are trading, with options, just ONE unit.

Product FeatureSPX Index Options – StandardSPX Index Options – SPX Weeklys and End-of-MonthMini-SPX Options (XSP)Nanos S&P 500 Index Options
Ticker SymbolSPXSPXWXSPNANOS
Contract Multiplier$100$100$100$1
Approximate Notional Size
(with index value of SPX at 4100, XSP at 410 and NANOS at 410)		$410,000
(4100 x $100)		$410,000
(4100 x $100)		$41,000
(410 x $100)		$410
(410 x $1)
Premium Dollar Price
Example: 2-day at-the-money (ATM) option		$3000$3000$300$3
A.M. or P.M. SettlementA.M. – settledP.M. – settledP.M. – settledP.M. – settled
Settlement TypeCash (no delivery of physical shares)
Settlement Date3rd FridayWeeklys: Every Trading Day
End-of-Month: Last Trading Day of Month		Mon., Tue., Wed., Thu., Fri., 3rd Fri. and Last Trading Day of MonthMonday, Wednesday, Friday
Exercise StyleEuropean (no risk of early assignment)
Tax Treatment60% long-term, 40% short-term capital gains1
Global Trading Hours3YesYesYesNo

Essentially, all the benefits, and negatives, of SPX and XSP discussed above apply to NANOS, just much, much, smaller.

Putting it all together.

All of the above, SPX, XSP, SPY, and NANOS are based on the S&P 500 index. The main difference, as a trader, is XSP is cash-based and based on the index while SPY is an ETF and you are buying/selling stock. XSP has favorable tax benefits but also has less volume and wider spreads.

The most important takeaway from this is the NANOS. This provides the ability to practice and enter options trading at a very low cost. Just ONE share at a time. $410 vs $41,000.

CONCLUSION

In conclusion, as someone just starting out in options trading, it’s important to find a product that meets your needs and budget. After comparing various ways to trade the S&P 500 index, I’ve discovered that standard SPX options, mini-SPX (XSP) options, SPY and IVV ETFs, and the recently introduced Nanos S&P 500 index options all have their unique benefits and drawbacks. However, for beginners, Nanos options stand out as the most affordable and accessible choice, allowing you to learn and practice options trading without risking a huge amount of capital. With an entry cost of just 1/1000th of the cost of SPX (1/100th the cost of SPY) per trade, I feel more confident and comfortable taking the first steps on your options trading journey.