Buying OEX Puts

 

For those who are very bullish on the OEX index over the near- or long-term, and who require a known, limited downside risk, buying an index call might be an appropriate strategy to use. Purchasing an OEX call option usually requires a smaller initial cash investment than an investment equal to the current underlying asset value (current OEX index level x $100 multiplier). In addition to reducing the capital at risk, the smaller call purchase amount offers the potential of leveraged profits if a bullish outlook proves correct. As OEX index continues to increase, the long OEX call’s profit potential is theoretically unlimited. On the downside, the call 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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