If you see the difference between the SPX and the /ES and you think there is money to be made in the difference you really need to watch this segment which will explain why the difference exists and how the market won't give you such an easy arbitrageable opportunity, focusing on dividends and the cost of carry. Every trader can benefit from the information here.

SPX is the S&P 500 Index. The index cannot be traded directly but options based on the SPX trade an average of more than 800,000 contracts per day. /ES represents the E-mini S&P 500 futures contract.

A graph of the price of the SPX (S&P 500) versus the price of the /ES (E-mini S&P 500 futures) from December 16th to December 22 was displayed. Both of these trading vehicles are representative of the S&P 500 but the prices can be very different. Some may think that this difference can be arbitraged and if you are in that group we are here to burst your bubble.

A table of the SPX price, the March /ES price and the cost basis of March SPX Synthetics was displayed. Tom and Tony explained how the SPX options are not priced to SPX but to the future value of the index adjusted for dividends and interest (which is how /ES futures are priced). There is no profit potential by trading SPX options against /ES.

The options on SPX are European exercise (meaning exercisable only at expiration), so you cannot capture profits on deep ITM options that are trading for less than intrinsic by exercising prior to expiration. Another table of the SPX price, the Feb 1700 Call Price, and the Intrinsic Value of the Call was displayed.

The guys go into greater detail to explain why the futures are currently trading at a discount to SPX. This previously unforeseen situation is the result of the current extremely low interest rates and Tom and Tony elaborate on that and present a simple formula.

Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the takeaways and other insights on why the difference in price exists between the SPX and the /ES and the math behind the pricing of the cost of carry.