SPX vs XSP Options: Which Should You Trade?

If you're trading S&P 500 index options for income, you've probably wondered: should I trade SPX or XSP? Both track the same index, but they're not interchangeable. The right choice depends on your account size, tax situation, and trading style.

I trade both SPX and XSP regularly, and I'm going to break down exactly when to use each one.

The Quick Comparison

What is SPX?

SPX options are the full-size S&P 500 index options traded on the CBOE. With the S&P 500 around 4,800, each SPX option controls roughly $480,000 in notional value.

Key characteristics:

• Cash settled — No shares change hands. At expiration, you receive (or pay) the difference between strike and settlement price in cash.
• European style — Can only be exercised at expiration, not before. This eliminates early assignment risk.
• Section 1256 tax treatment — Gains are taxed 60% long-term, 40% short-term regardless of holding period. This is a significant advantage for short-term traders.

What is XSP?

XSP is the "Mini-SPX" option. It's exactly 1/10 the size of SPX, making it accessible to smaller accounts while keeping all the same benefits.

Think of XSP as SPX for the rest of us. Same underlying index, same settlement rules, same tax treatment, just sized for accounts that can't swing full SPX contracts.

When to Trade SPX

Choose SPX if:

• Your account is $50,000 or larger
• You want the tightest bid-ask spreads
• You need extended trading hours
• You're trading credit spreads with defined risk
• Commission costs per contract matter less than execution quality

The main advantage of SPX is liquidity. Tighter spreads mean better fills, and that adds up over hundreds of trades per year.

When to Trade XSP

Choose XSP if:

• Your account is under $50,000
• You want to scale into positions gradually
• You're learning and want smaller risk per trade
• You want the 60/40 tax treatment but can't afford SPX
• You prefer more precise position sizing

XSP lets you trade 10 contracts instead of 1 SPX contract for the same notional exposure. This gives you more flexibility to scale in and out of positions.

The Tax Advantage (Both SPX and XSP)

One of the biggest reasons to trade index options over ETF options (like SPY) is the Section 1256 tax treatment.

Here's how it works:

• 60% of your gains are taxed at long-term capital gains rates (max 20%)
• 40% of your gains are taxed at short-term rates (your ordinary income rate)
• This applies regardless of how long you held the position

For a trader in the 35% tax bracket, this means paying an effective rate of around 26% instead of 35% on short-term trades. On $50,000 of annual trading profits, that's $4,500 in tax savings.

SPX vs XSP vs SPY Options

Many traders start with SPY options because they're familiar. Here's why you might want to switch:

The bottom line: if you're trading S&P 500 options regularly, SPX or XSP will likely save you money on taxes and eliminate assignment headaches.

Which Do We Use at A Trade or Two?

We trade both, depending on the situation:

• SPX for larger defined-risk trades where liquidity matters
• XSP when we want more precise position sizing or are scaling into a position
• ES options (E-mini futures) for overnight or early-morning setups

Our trade signals include setups for all three, so you can choose based on your account size and preferences.

Getting Started

If you're new to index options, start with XSP. The smaller size lets you learn the mechanics without risking large amounts. Once you're comfortable and your account grows, you can move up to SPX.

The most important thing is to start. The tax advantages alone make index options worth learning.