There are a number of different types of options contracts available on broad-based U.S. equity indexes. Some of the most actively traded products include options on SPY, SPX options, and the Mini-SPX contract (XSPSM). They all track the S&P 500® and both SPY and Mini-SPX options have the same notional size, making them somewhat interchangeable. A key difference, however, is settlement style.
Options may be “cash settled” or “physically delivered.” All equity (single stock) and ETF options physically deliver when exercised or assigned. In other words, at expiration, in-the-money options are exchanged for shares in the underlying security (equity or ETF). SPY ETF options expire into a long or short position in the ETF product. Index options, like Mini-SPX, are cash settled. This key difference is particularly important when we talk about “gap risk.” Let’s explore.