S&P 500

The S&P 500 Index, which is produced by Standard & Poor's, is widely considered to be the best single barometer of U.S. equities. Its origins go back to 1923 when Standard and Poor's introduced an index that covered 233 companies. In 1957 it was expanded to its present size.

The S&P 500 is a capitalization weighted index, in that the weighting given to any particular component of the index is determined by a combination of the market price of it shares multiplied by the number of outstanding shares. And while the Index does focus on larger companies, with 80% of equities covered it is an approximate bell-weather for the market as a whole.

The most common ways of trading the S&P 500 are through either the SPDRs tracking stock or SPX Index options.

The SPDR Trust is a unit investment trust that issues securities called "Standard & Poor's Depository Receipts" or "SPDRs".  The Trust trades on the American Stock Exchange under the ticker symbol SPY. When you purchase a SPDR, you're actually investing in the SPDR Trust, which is a unit investment that holds shares in all the companies comprising S&P 500.

The Trust commenced operation on Jan 22, 1993 and is due to terminate in Jan 2118. Its purpose is to match the price and yield performance of the S&P 500. It does this by holding all of the stocks in the Index and, as the composition of the Index changes, it replicates those changes in the portfolio of Index securities held by the Trust.

The Trust issues its securities in what are termed "Creation Units" comprising 50,000 SPDRs at a time, and it is these shares which trade as the SPY S&P tracking stock. Each share represents an ownership interest in the Trust, which in turn gives the holder of the share an ownership interest in each of the 500 companies making up the Index.

SPX Index options, which are traded exclusively on CBOE, are European style options in that they can can only be exercised on the last business day before expiration. In this way, they are the same as the XEO options on the S&P 100.

As with most Index options, the strike prices initially listed are in-the-money, out-of-the-money and at-the-money, with additional strikes being added at 5 point intervals as the market moves. And once again they are cash settled which means that, as the writer of an SPX option which has been exercised, you will need to settle the amount owing in cash.  

The pricing of SPX options is the same as other index and equity options in that the same multiplier (100) is used.

Apart from these differences, Index options are the same as equity options, in that the two basic types, puts and calls, form the basis for all the different strategies - vertical spreads, calendar spreads, ratio spreads, covered calls, etc. 

As with the DOW and the NASDAQ, there are a number of other funds that allow you to "trade" the SPX Index. Three of the main providers of these funds are iShares, Rydex and ProFunds.