Core: SPX (S&P 500 Index) and XSP (S&P 500 Mini)
The bulk of the journal's trades are built around SPX and XSP options. The reasons are structural:
- Liquidity. SPX and XSP options are the most liquid equity index options in the world. Tight bid/ask spreads, deep order books, and a dense expiration calendar (every business day in some cases) make entries and exits cheap.
- Cash settlement. Both settle to cash, not shares. No assignment risk on short positions, no risk of being put or called into a stock you didn't want.
- European exercise. SPX and XSP options cannot be exercised before expiration. This eliminates early-assignment risk on short options, which simplifies the management of credit spreads and iron condors.
- Tax efficiency. SPX options are taxed under Section 1256 — 60% long-term, 40% short-term capital gains regardless of holding period. This is a structural advantage over ETF options for active traders.
- Defined-risk strategies fit. Spreads, iron condors, butterflies, and ratio structures all work cleanly on SPX and XSP with a stable underlying and predictable behavior.
SPX vs. XSP — When to Use Which
SPX uses a $100 multiplier. XSP uses a $10 multiplier. The premium ratio is exactly 10:1. For a given strike, an XSP spread is 1/10th the notional of the equivalent SPX spread. XSP is used when the desired position size is between the SPX "round number" sizes — for example, a $1,500 max-loss target is awkward to build in SPX but natural in XSP. The journal uses both.
Sector ETFs (Selective)
When relative-value opportunities arise, the journal may trade options on the 11 sector SPDR ETFs:
- XLK — Technology
- XLF — Financials
- XLE — Energy
- XLV — Health Care
- XLY — Consumer Discretionary
- XLP — Consumer Staples
- XLI — Industrials
- XLU — Utilities
- XLB — Materials
- XLRE — Real Estate
- XLC — Communication Services
Sector trades are usually directional plays (debit spreads, single-leg longs) where the thesis is a relative outperformance/underperformance call against SPX. They are smaller in size and less frequent than the index trades.
Why Not Individual Stocks
The journal does not trade single-name equity options as a rule. The reasons: idiosyncratic event risk (earnings, M&A, management), higher IV and skew instability, less liquid option chains, and American exercise (early assignment risk). The structure of the book is designed to be a steady, defined-risk overlay on a broad market view — not a stock-picking exercise.
Volatility as an Instrument
VIX options and VXX are referenced in the methodology and the playbook for hedging and for trading volatility regimes, but they are not a primary instrument. VIX options have their own behavioral peculiarities (contango, mean reversion) and are treated as a separate chapter in the playbook.