Why SPX and SPY Call Premiums Can Differ

Summary

The document compares premiums for calls on SPX and SPY when the index is roughly ten times the ETF’s level. It asks why scaling the SPY premium by that ratio would suggest a higher SPX premium than the example quotes show. The response identifies three potential contributors: SPY’s dividend yield, relative liquidity, and differences in hedging costs faced by market makers.

The answer treats dividends as the largest factor, explaining that expected distributions reduce the value of a SPY call relative to a comparable claim without dividends. It also suggests that liquidity can affect valuation and that the costs of hedging an index option versus an ETF option may differ. These are qualitative explanations, not a full valuation or a controlled comparison: the document does not specify volatility, interest rates, forward levels, contract details, or a calculation that isolates each factor. The quoted premiums are a single example and should not be read as a general pricing rule.

Key ideas

• Dividend yield can lower call values on an ETF compared with a comparable claim without distributions.
• Liquidity differences may influence option premiums and market-maker pricing.
• Hedging costs can vary between index options and ETF options.
• A price comparison should account for contract terms and market inputs beyond the underlying price ratio.

Tags

# Discrepancy between SPX and SPY call premiums


# Discrepancy between SPX and SPY call premiums












SPX is usually around 10x that of SPY. SPY is at 217 means SPX is roughly 2165 to 2175. I understand that one is an ETF and the other just 'tracks', SPY gives out dividends, SPY is more liquid, etc.

However, for example, for Sept 2 expiry the call premiums are as follows (both of these are PM settled):

```
Call SPY @218 = $0.59

Call SPX @2180 = $4.1
```

I would have expected SPX to be around >= $5.5 Can any experienced traders explain the discrepancy?

## Answer by FX_NINJA (score 2)

https://quant.stackexchange.com/a/29929

Some Factors in play:

- (MOST IMPORTANT) Dividend yield, if there was no dividend on SPY call value would go up to about ~0.50 USD

- Liquidity premium, if two assets are identical in every way except liquidity, more liquid asset has a higher value to investors. However in this case I think the liquidity premium is more an issue for the market maker than anyone.

- Costs, I doubt costs are equal for Futures trading of SPX vs ETF Trading of SPY, driving costs up. This has to do with the cost of hedging for the market maker.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.