Buying OEX Calls To Participate in Market Advances

Who Should Consider Buying OEX Calls?

  • An investor who is very bullish on the Standard & Poor’s 100 index (OEX) and wants to profit from a rise in its level
  • An investor who wants diversify a portfolio with upside exposure of the S&P 100, but may not be willing (or able) to commit the cash to an investment in a portfolio of multiple component stocks (or downside risk)
  • An investor who would like to take advantage of the leverage that options can provide, and with a limited dollar risk

Buying an OEX call is one of the simplest and most popular strategies used by option investors employing OEX index options. It allows an investor the opportunity to profit from an upward move in the level of the OEX, while having much less capital at risk than with the outright purchase of scores of OEX component issues.

Definition

Buying an OEX index call gives the owner the right, but not the obligation, to buy the value of the underlying index at the stated exercise (strike) price upon exercise. If the contract is exercised, the call owner will receive its cash settlement amount: the difference between the call’s strike price and the OEX exercise settlement value, times the $100 contract multiplier. American-style OEX index options may generally be exercised at any time prior to the expiration date. Any long OEX option (call or put) may be sold in the marketplace on or before its last trading day if it has market value.

This is a bullish strategy because the value of the call tends to increase as the level of the OEX index rises, and this gain in option value will increasingly reflect a rise in the value of the OEX when its level moves above the call option’s strike price.

The profit potential for the long OEX call is unlimited as the OEX index continues to rise. The financial risk is limited to the total premium paid for the option, no matter how low the OEX declines. The break-even point is an OEX index level equal to the call’s strike price plus the premium paid for the contract. As with any long option, an increase in volatility has a positive financial effect on the long OEX call strategy while decreasing volatility has a negative effect. Time decay has a negative effect.

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