How to Trade in SPX Options

"SPX" is the stock market symbol for the S&P 500 stock index. Options trading on the SPX allows traders to set strategies to profit from projected changes in the stock index. Call options on SPX increase in value if the S&P 500 goes up; put options if the S&P 500 declines. An SPX option trader can use a prediction strategy for the direction of the S&P 500, and the purchase of call or put options to profit from the predicted changes.

Open an account with an online stockbroker that specializes in options trading. An active options trader needs a combination of low commissions plus broker-provided charting and pricing tools. The Barron's 2010 Broker Review lists thinkorswim, TradeMonster, MB Trading and OptionsXpress as top brokers for active options traders.

Set up charting software from the broker to track the value of the S&P 500. The software package includes technical indicators that help you predict trends and reversals in the stock index.

Practice trading using the broker's simulated money-trading account. Buy call options when you predict the SPX will rise, and buy put options when you expect it to decline. Use the practice account to try different strike prices and expiration dates to reach your profit goals and control the risk. This practice trading also allows you to become familiar with the broker's trading system.

Switch to live options trading when you're consistently profitable trading in your simulated account. Not all trades result in profits, but you should be able to grow your account value and understand why your losing trades were losers.

Tips

  • Brokers who specialize in options trading provide a large amount of online educational materials for trading and using their systems. Study these resources before you start trading.

    Focus on the options contracts with the most trading activity to start. Actively traded options have the best pricing and quickest order fill.

Warnings

  • Options trading is a high-risk venture — it's possible to lose 100 percent or more of your invested amount in a short period of time. The Securities and Exchange Commission (SEC) stresses the need for self-education before attempting any options trading program.

References

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.