For those who are moderately bullish on the OEX index over the near- or long-term, and who require a known, limited downside risk, buying an OEX bull call spread might be an appropriate strategy to use. An OEX bull call spread requires a smaller initial cash investment than the purchase of only the long call because of the premium an investor receives by selling a higher-strike call. As a trade-off, the investor’s upside profit potential is limited. On the downside, the bull call spread buyer’s maximum loss is known in advance and is limited entirely to the total debit initially paid for the spread.
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).