What Are XSP Options? The SPY Alternative

The Best of Both Worlds

For retail traders, deciding between SPX and SPY for 0DTE trading involves a difficult compromise:

• SPX: Offers cash settlement (no pin risk) and great tax advantages, but the contracts are massive and expensive.
• SPY: Contracts are small and affordable, but they carry severe assignment risk and standard tax treatment.

Enter the XSP (Mini-SPX Index Option).

The XSP tracks the Mini-SPX Index, which is designed to be 1/10th the value of the standard S&P 500 Index. This puts the price of the XSP almost perfectly in line with the SPY ETF.

Key Benefits of XSP for 0DTE

1. Cash Settled: Like its big brother the SPX, the XSP is cash settled. You never take delivery of shares. You can safely hold an XSP contract through the closing bell without fear of assignment or pin risk.
2. Section 1256 Tax Advantages: Under US tax law, XSP options qualify as Section 1256 contracts. This means 60% of your gains are taxed at the favorable long-term capital gains rate, and 40% at the short-term rate, regardless of how long you held the trade. SPY options are taxed entirely at the short-term rate.
3. European Style Exercise: XSP options cannot be exercised early.

The Drawback: Liquidity

If XSP is structurally superior to SPY, why does anyone trade SPY? Liquidity.

The SPY options chain is the most liquid financial instrument on earth. The bid-ask spreads are universally a penny wide. XSP, while growing in popularity, does not have the same massive volume. Spreads can occasionally widen, meaning you may experience slightly more slippage when entering and exiting trades compared to SPY.