As most readers know, I trade RUT.  Those are options on the Russell 2000 Index.  Ive been asked why I dont trade IWM, an exchange traded fund (ETF) that mimics the performance of the same Russell Index. 

IWM trades almost exactly @ 1/10 the price of its big sister, RUT, and its options have very attractive markets, with the bid/ask spreads being a penny or two wide.  Heres a quote screen from Wed, Apr 22, early in the afternoon:

Those are very attractive markets to trade.  If these are two cents wide, thats equivalent to trading RUT options when the bid/ask spreads are only 20 cents wide .  Here are the RUT markets a few minutes later .

As you can see, the RUT markets compare favorably with IWM prices.  When the markets were wild, just a few short months ago, I dont know if this was true.  Tighter markets, and the probability of getting much better fills (trade executions) would be a good reason to consider trading the options of IWM rather than RUT.  There is no advantage at this time.

An investor

interested in options on the S&P 500 Index has the choice between

trading SPX options, or its equivalent ETF, SPY.

Are there other considerations for making the decision?

1) Small traders may not want to trade as much as a one-lot in RUT, and can invest smaller sums by trading a few contracts of IWM.

2) IWM options are American style, and RUT options are European style.  If you are not familiar with the important differences between these option styles, check out my previous discussion on this topic.

I prefer trading cash-settled options, so thats a plus for RUT.

On the other hand, those Friday morning settlement prices can be unsettling.  My recommendation is to avoid owning positions into that possible chaos, but not everyone does that.  American style IWM (or SPY) options expire Friday afternoon, and thats one advantage (assuming you dont mind an expiration that occurs 6.5 hours later).   The settlement process is a plus for IWM.

3)  Addendum.  Thanks Income trader and kbluck. One big advantage for trading index options is the 60/40 income tax advantage.  You can claim 60% of the profits as long-term capital gains, and that cannot be done when trading ETF options.

On balance I do not see any substantial advantages to trading the options of the much lower-priced ETF options than trading options on the index.  Dont forget than you would have to trade 10 contracts of the ETF for every one index option to have the same profit potential.  For most traders, that means commissions would be much higher.  That could be the deciding factor for many.