What is OEX?
OEX, short for the S&P 100 Index options, is represented by a ticker symbol used in trading on the Chicago Board Options Exchange (CBOE). The S&P 100 index encompasses 100 of the largest publicly traded companies in the United States, based on market capitalization. While OEX options were once the standard for index options trading, they have been somewhat overshadowed by options on the S&P 500 Index (SPX) in terms of popularity and market usage.
Key Takeaways
- Ticker Symbol: OEX designates Standard & Poor's 100 index options traded on the CBOE.
- Market History: Initially, OEX options set the benchmark for index options trading but have since seen a decline in popularity compared to SPX options.
- Market Usage: Traders utilize OEX options for hedging risks or speculating on fluctuations in the performance of large-cap stocks.
The Evolution of OEX Options
OEX options have a significant historical context. They were the first index options offered in the U.S. stock market, marking a pivotal moment for options trading when they debuted in 1983. Despite OEX's early beginnings, the rising popularity of SPX options eventually led to the latter becoming the preferred choice for many traders.
An important change occurred in 2003, when the calculation for the CBOE Volatility Index (VIX) transitioned from relying on OEX options to using those on the S&P 500 Index, a move that highlighted the growing dominance of SPX options in the derivatives market. However, VXO, which reflects the historical volatility of OEX, continues to provide insights for investors interested in the performance of those original indices.
The Standard & Poor’s 100 Index
The S&P 100 Index consists of 100 high-capitalization companies selected from the broader S&P 500 Index. This index serves as a barometer for the performance of large-cap U.S. stocks across various sectors, giving traders and investors a focused view of the market.
Components and Selection Criteria
The companies included in the S&P 100 are chosen based on strict criteria that ensure they meet specific standards regarding options availability and market capitalization. For inclusion, a stock must have options trading available and at least 50% of its shares should be available for public trading. This structure helps maintain the fluidity and utility of the index as a reliable measure of performance for institutional investors and asset managers engaged in large-cap investments.
Options Trading Basics
What are Options?
Options are financial derivatives that provide the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before or at a specified expiration date. For OEX options, this underlying asset is the S&P 100 Index. OEX options settle in cash since an index cannot be physically delivered.
Hedging and Speculation
Traders leverage OEX options for various strategies, with two primary goals: hedging against market risk and speculating on market movements. Options trading strategies can range from simple to complex, including:
- Vertical Spreads: Involves buying and selling options of the same class with different strike prices or expiration dates.
- Strangles: A strategy that entails purchasing a call and a put option at different strike prices but with the same expiration date.
For example, a portfolio manager may own a basket of blue-chip stocks and want to protect against short-term market downturns. To mitigate the risk, the manager can purchase OEX put options to act as insurance against potential losses, thus maintaining a level of security over their investments.
Conclusion
Despite facing competition from SPX options, OEX options remain an integral part of the investment landscape, particularly for institutional investors. These options provide traders with tools to hedge large-cap exposure while facilitating a variety of strategic maneuvers in the complex world of derivatives trading. Understanding OEX and its underlying index can help investors and traders navigate the turbulent waters of the stock market more effectively.