Buying OEX Calls

 

For those who are very bearish on the OEX index over the near- or long-term, and who require a known, limited upside risk, buying a put might be an appropriate strategy to use. Purchasing an OEX put option requires a smaller initial cash investment than the margin requirement for a short sale of multiple shares of component stocks. In addition, there are no margin calls, nor does a put holder pay any dividends. This reduces the capital at risk and offers the potential of leveraged profits if a bearish OEX outlook proves correct. As the OEX index level continues to decrease, the long OEX put’s profit potential is limited only by the index declining to no less than zero, and large returns on investment can be seen. On the upside, the investor with short stock positions is exposed to a potentially unlimited dollar loss from an increase in share value, while the OEX put buyer’s maximum loss is known in advance and is limited entirely to the option’s purchase price.



Selling vs. Exercising Expiring OEX Options

Remember that OEX options have American-style exercise and P.M settlement characteristics. An investor with a long call or put position may sell that position, if it has market value, on any day up to and including the last trading day, usually the Friday preceding the expiration date. A long OEX option may also be exercised at any time up to its last trading day. However, the OEX’s exercise settlement value on the day of exercise may or may not be the observed level of OEX at the close of the stock market (3:00 p.m. Central Time). The settlement value is officially reported, and an OEX option’s cash settlement amount calculated, after all component stocks of the OEX have closed for trading and their closing prices reported, which generally occurs before the close of OEX option trading.

In other words, an option that is in-the-money (or out-of-the-money) at the close of the stock market (3:00 p.m.) may or may not be so afterwards when the official OEX exercise settlement value is reported.



Option Premium and Exercise Style

Investors may observe that American-style options trade at higher relative value than European-style options with similar contract size. This is because investors may pay more for American-style contracts in exchange for the right of early exercise (before expiration).

 

 

 
 

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