What is OEX?
OEX, which trades on the Chicago Board Options Exchange (CBOE), is the stock symbol used to identify the 100 options in the Standard & Poor’s index.
Key points to remember
- OEX, which trades on the Chicago Board Options Exchange (CBOE), is the stock symbol used to identify the 100 options in the Standard & Poor’s index.
- OEX options were the original standard for trading index options on the domestic stock market, although over time the options on the S&P 500 (SPX) became popular.
- Traders use OEX options to hedge or speculate on the performance of the large market cap segment.
OEX options were the original standard for trading index options on the domestic stock market. Over time, the options on the S&P 500 (SPX) have surpassed them in popularity. To the dismay of OEX followers, the calculation of the CBOE volatility index, called VIX, went from using OEX options to SPX options in 2003. Traders can watch the old version via the symbol VXO.
The Standard & Poor’s 100 index is a subset of the larger Standard & Poor’s 500 index and tracks the performance of the 100 largest stocks, by market capitalization, in the US market. It is a capitalization-weighted index and stocks are chosen from a wide range of sectors, making the index an indirect indicator of the performance of US companies. Each component share is weighted according to the total market value of its outstanding shares. Consequently, the impact of the variation in the price of a component is proportional to its market capitalization or to its market value, which is the share price multiplied by the number of shares in circulation.
While not as popular as the S&P 500, it remains an important benchmark for many asset managers with money invested in the great, top-notch arena. The key criterion for including a stock in the index is to have options available, and at least 50% of the stock must be available to the general public for trading.
Options give the holder the right, but not the obligation, to buy or sell the underlying asset at a specific price on or on a specific date. In the case of OEX options, this would be the right to buy or sell the S&P 100 index. Since an index is not a tangible item, OEX options are settled in cash.
Traders use OEX options to hedge or speculate on the performance of the large market cap segment. Strategies, such as vertical spreads and bottlenecks, are possible with OEX options as well as with individual stock options.
For example, a portfolio manager has a portfolio of blue chip stocks, but is concerned that short-term market conditions may have a negative impact. The manager could cover himself by buying an OEX put option with a close expiration date as insurance, in case the market suddenly drops. Although the managed portfolio does not hold the 100 OEX stocks in the same proportions, the correlation between the two could be strong enough for the hedging to make sense.