OEX

Deciphering OEX: A Comprehensive Guide

OEX, the ticker symbol for Standard & Poor's 100 index options, is a cornerstone of options trading on the Chicago Board Options Exchange (CBOE). While once the primary standard for index options trading, its popularity has waned over time, with options on the S&P 500 (SPX) taking precedence. In this detailed guide, we delve into the intricacies of OEX, its significance in the market, and how traders utilize it for hedging and speculation.

Unveiling OEX

Originally, OEX options held sway as the standard for index options trading in the domestic stock market. However, their prominence has diminished, particularly with the ascent of options on the S&P 500 (SPX). The shift was underscored in 2003 when the calculation for the CBOE volatility index, VIX, transitioned from OEX options to SPX options, much to the chagrin of OEX enthusiasts. Nevertheless, the legacy of OEX endures, with traders still able to track its volatility through the symbol VXO.

Understanding the Standard & Poor's 100 Index

The Standard & Poor's 100 index is a subset of the broader Standard & Poor's 500 index, comprising the 100 largest stocks in the U.S. market by market capitalization. This index serves as a barometer for the performance of large-cap stocks across various industries. Each component stock's weight in the index is determined by its market capitalization, reflecting the total market value of its outstanding shares. As such, changes in the price of a component stock have a proportional impact based on its market cap.

The Importance of OEX in the Market

While not as prominent as the S&P 500, the OEX remains a vital benchmark for asset managers navigating the blue-chip arena. Inclusion in the index hinges on the availability of options for the stock, with at least 50% of shares open for public trading. This criterion underscores OEX's role as a crucial reference point for assessing the performance of large-cap stocks in the market.

Exploring Options Trading with OEX

Options grant holders the right, though not the obligation, to buy or sell the underlying asset at a predetermined price within a specified timeframe. With OEX options, traders gain exposure to the S&P 100 index, settling for cash since an index isn't a tangible asset. Utilizing OEX options, traders can hedge against market volatility or speculate on the performance of large-cap stocks. Strategies like vertical spreads and strangles are viable, offering flexibility akin to individual stock options.

For instance, a portfolio manager holding a basket of blue-chip stocks may opt to hedge against short-term market fluctuations by purchasing OEX put options. This strategy serves as insurance against sudden market downturns, leveraging the correlation between the portfolio and the OEX index.