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DJX Faq

Option on the Dow Jones Industrial Average - DJX

This list of "Frequently Asked Questions" (FAQ) is a representation of questions commonly asked regarding the Dow Jones Industrial AverageSM and options based on The Dow.

What is DJX?

DJX is the symbol for options based on The Dow Jones Industrial Average (DJIA). The DJIA is a price-weighted index of 30 of the largest, most liquid NYSE and NASDAQ listed stocks. The DJX index option contract is based on 1/100th (one-one-hundredth) of the current value of the Dow Jones Industrial Average. So, for example, when DJIA is at 10,000, the DJX level will be 100.

The DJIA--the index on which the DJX contracts are based--is the oldest (established 1896) continuing U.S. market index. It is called an "average" because it originally was computed by adding up stock prices and dividing by the number of component stocks. The methodology remains the same today, but the divisor has been changed to preserve historical continuity. The DJIA is perhaps the best-known market indicator in the world.
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Who created the Dow Jones Industrial Average?

The Dow Jones Industrial Average was originally devised by Charles Dow (one of the founding partners in the Dow Jones Company, Inc.) in 1896 as a way for investors to compare the price changes of many individual industrial stocks to the course of the market as a whole. The flagship publication of the Dow Jones & Company was, and is, the over a century-old Wall Street Journal.

Daily publication of the DJIA in The Wall Street Journal began on October 7, 1896. The number of industrial average stocks expanded over time to the current 30 in 1928. The 30 stocks now in the index are all major factors in their industries, and their stocks are widely held. They represent about one-fifth of the $10 trillion-plus market value of all U.S. stocks and about one-fourth of the value of stocks listed on the New York Stock Exchange.

At present, the editors of The Wall Street Journal select the components of the Dow Jones Industrial Average.
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Who created the DJX Index Options?

The DJX index contract was created by the Chicago Board Options Exchange in 1997, under an historic agreement with Dow Jones & Company, Inc. Dow Jones & Company still manages the Dow Jones Industrial Average, on which the DJX is based, and is responsible for the addition and deletion of securities.
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How are DJX options premiums quoted?

DJX option premiums are quoted in a manner identical to equity options. Premium quotes are stated in decimals. One point equals $100. Minimum tick for options trading below 3.00 is 0.05 ($5.00) and for all other series, 0.10 ($10.00).

Exercise, or strike prices, of DJX options and LEAPS are set at 1 point intervals to bracket the current value of the index.
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Are DJX options European or American-style?

DJX options are European-style. This means they can be exercised only on expiration. DJX options, available in up to 3 near-term months plus up to 3 months on quarterly cycle, expire on a monthly basis on the Saturday immediately following the third Friday of the expiration month until February 15, 2015. On and after February 15, 2015, the expiration date will be the third Friday of the expiration month.

The settlement value is calculated based on the opening prices of the component securities in the index on the business day prior to expiration. This value is calculated by Dow Jones & Company, Inc.

DJX options are cash-settled. This means that cash is delivered at settlement, not securities.
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Who selects the stocks included in the DJX?

The editors of The Wall Street Journal select the components of the index. The DJIA now represents about one-fifth of the $10 trillion-plus market value of all U.S. stocks and about one-fourth of the value of stocks listed on the New York Stock Exchange. In choosing a new company, the WSJ editors look among substantial industrial companies with a history of successful growth and wide interest among investors.

The components are rarely changed. The most frequent reason for changing a stock is that something is happening to one of the component companies, such as being acquired. Whenever one stock is changed, the remainder are reviewed.
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How is the Dow Jones Industrial Average calculated?

The Dow Jones Industrial Average is calculated by the Dow Jones & Company, Inc. It is a price-weighted index. (In contrast, for example, the S&P 100? and S&P 500? indexes are capitalization-weighted.)

When he devised the DJIA in 1896, Charles H. Dow simply added up the prices of the stocks in his average and divided by the number of stocks. Today, the principles of the calculation are the same, but over time the divisor has been changed to preserve historical continuity. The most frequent reason for such an adjustment is a stock split. Without an adjustment in the divisor, a stock split would obviously produce a distortion in the industrial "average".

Historical and current component and divisor information can all be found at the Dow Jones Web Site. The latest DJIA divisor can also be found published daily on page C3 of The Wall Street Journal. The DJIA components are selected and monitored by the editors of The Wall Street Journal.
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How is the DJX calculated?

The DJX index option contract is based on 1/100th (one-one-hundredth) of the current value of the Dow Jones Industrial Average. For example, when the Dow Jones Industrial Average is at 10,000, the DJX level will be at 100.
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Is the DJX similar to the OEX and SPX? Do the indexes move together?

No. DJX is based on the Dow Jones Industrial Average--a price-weighted index of 30 stocks--while the OEX (Standard & Poor's 100) and SPX (Standard & Poor's 500) are based on capitalization-weighted indexes of 100 and 500 stocks, respectively. All three are popular indexes and share many component stocks, but they differ significantly in composition and weighting, and therefore differ in movement also.

The DJIA consists of 30 large NYSE-listed "blue-chip" industrial stocks and is a price-weighted index. This means that the prices of the 30 stocks are totalled and then divided by a divisor.

The S&P 100, which the OEX represents, consists of 100 stocks and is capitalization-weighted. Each component in the index is weighted according to its market capitalization, i.e. the share price multiplied by the number of outstanding shares. The OEX has historically had a high correlation with the S&P 500. The S&P 500 (SPX) comprises an even larger number of components (500) and is considered an institutional benchmark for the domestic large-cap equity market.

While historically the long-term patterns of the DJIA, S&P 100 and S&P 500 index levels have tended to be similar, differences in index composition and weighting methods can cause the index levels to move in dissimilar ways, especially in the short term.
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How often is the index recalculated during the trading day?

The index is calculated in real-time, continuously throughout the trading day.
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How does options exercise/assignment work with DJX options?

Although the value of a DJX option is based on the value of the DJIA, investors will not receive stocks, or have to deliver stocks, if the options are exercised. As European-style options, DJX contracts can only be exercised on expiration. Investors holding long positions will receive cash if the option has value at expiration and it is exercised. This is known as cash-settlement.

This is a key difference between index and equity options. Equity options can be exercised as a means to buy or sell the underlying stock. The process is different with index options because they are cash-settled. When a DJX option is exercised, the option holder receives the in-the-money amount in cash, and the option writer pays that amount.
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Do DJX options have to be held until expiration?

No, DJX options don't have to be held until expiration. They can be bought and sold in the open market at any time up to two business days before expiration. However, as European-style options, DJX options can be exercised only on expiration.
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Are there LEAPS available on the DJX?

Yes. LEAPS are available with expirations up to three years in the future.
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How might DJX options be valuable to an individual investor?

One of its important uses could be as a portfolio hedging instrument. DJX can be an excellent tool for managing the risk/reward balance of a blue-chip U.S. stock portfolio, to the degree that it (or a segment thereof) matches the components and weighting in the Dow Jones Industrial Average. Also, the European exercise style means that you can rely on being allowed to hold your DJX options until expiration. And if you prefer to alter your position

earlier, you are free to trade your DJX options on the open market, up to two business days before expiration.
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What is the genesis of the Dow Jones Industrial Average?

In 1882, two reporters, Messrs. Dow and Jones, left their employer, the Kiernan News Agency in New York City, to form Dow Jones & Company. Their first office was on Wall Street, adjacent to the stock exchange. With the assistance of Charles Bergstresser, another former employee of Kiernan who later became a Dow Jones partner, news was gathered, handwritten and rushed by messenger boys throughout the financial district.

Mr. Charles Dow was the partner who devised stock averages to allow investors to discern price movement in the market as a whole and to compare individual stocks' performance to a broader measure. The Dow Jones Industrial Average, comprised of 12 'smokestack' companies, made its debut May 26, 1896. [Twelve years earlier, Mr. Dow's initial stock average, containing 11 stocks (nine of which were railroad issues) had appeared in Customer's Afternoon Letter, a daily two-page financial news bulletin that was the precursor of The Wall Street Journal.]

Although Charles Dow was the pre-eminent partner, Eddie Jones (not the Edward Jones of the Edward D. Jones & Co. brokerage firm) was more visible. He dealt with messengers scurrying in and out of the office, wrote and edited bulletins, and spent nights scouring for tips at the watering holes frequented by his racy friends, the pool operators and wheelerdealers of Wall Street. Ironically, he had nothing to do with the devising of the Dow Jones Industrial Average, which bears his name.

The austere Mr. Dow eventually grew uncomfortable with the fast circles of his friend Mr. Jones, who had grown up in a more affluent environment. Mr. Jones took on an air of calm and command during times of crisis. Mr. Jones gradually felt estranged from his two partners, and in January 1899, he left the newsletter and went into the brokerage business on Wall Street.

Charles M. Bergstresser--the third principal--deserves credit for bankrolling a publishing venture with cash-poor Charles Dow and Edward Jones, beginning in 1882. Unfortunately, he didn't get any. "Bergstresser" was too long to be included in the company's name, Dow Jones & Co. So he also missed out on being immortalized by the naming of the Dow Jones Industrial Average, which Mr. Dow invented 14 years later.

When Dow Jones & Co. turned its business newsletter into a full-fledged newspaper in 1889, it was the firm's unnamed partner who named it. Mr. Bergstresser dubbed it "The Wall Street Journal".

The first edition of The Wall Street Journal appeared July 8, 1889. Mr. Dow was editor. He maintained an active role in Dow Jones and the Journal, frequently writing editorials, until 1902, when failing health led him to sell the company to Clarence W. Barron, whose descendants continue to have a controlling interest in it.

Today, it is the editors of the WSJ--Dow Jones & Company's flagship responsible for monitoring the composition of the Dow Jones Industrial Average and selecting replacement stocks should changes be called for. (Drawn from documents in averages.dowjones.com/frameset.html, courtesy of Dow Jones & Company, Inc.)
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How can an investor use DJX options for long-term portfolio management?

Long-term Equity AnticiPation SecuritiesTM (LEAPS?) based on the Dow Jones Industrial Average offer investors an exciting new way to take a long-term position in the stock market with quantified risk at a fraction of the cost of purchasing shares of stock. Finally, investors can capitalize on their long-term forecasts for the market, up to three years in the future, with one transaction.

The investment time frame of LEAPS is much longer than that of traditional DJX options. While traditional options provide opportunity to capture market gains due to short-term, even daily, fluctuations in the market, LEAPS based on the DJIA allow investors to buy and hold a market position for up to three years. Investors need not predict precise timing of the market movements to profit - they need only correctly predict market trends over time. And like all options transactions, the buyer's risk is limited to the amount of the premium paid (plus commissions).

LEAPS offer the possibility to generate a greater percentage return and tie up less capital compared to a similar position in the stock market. Because few investors can purchase every stock they follow, LEAPS allow them to diversify with fewer dollars at risk.
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Where are DJX options traded?

DJX options are traded exclusively on the CBOE, the world's leading options marketplace. CBOE revolutionized options trading in 1973 by creating the first listed options. It is only natural that CBOE, the creator of and leader in listed options trading, offers investors options on the Dow Jones Industrial Average. In 1983, CBOE created the world's first index options product - options based on the S&P 100 Index. Known as OEX, this product is the most actively traded index options contract in the world. Additionally, CBOE trades options based on 11 broad-market indexes - including the S&P 500 Index, which is generally considered to be the performance benchmark for the market followed by institutional funds; the Russell 2000 Index, a measure of the performance of small companies; and the Nasdaq- 100 Index, a benchmark of OTC issues. Options trading at CBOE is conducted by "open-outcry" on a 45,000-square-foot trading floor. This floor is supported by state-of-the-art systems and automation, enabling CBOE to execute options trades with unsurpassed levels of speed and efficiency.
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Options involve risk and are not suitable for all investors. Prior to buying or selling options, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information in these materials is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in these materials. No statement within these materials should be construed as a recommendation to buy or sell a security or to provide investment advice. Any strategies discussed, including examples, do not include commissions, dividends, margin, taxes, and other transaction costs. However, these costs will affect the outcome of transactions and should be considered. S&P 100 and S&P 500 are registered trademarks of the McGraw-Hill Companies, Inc., and are licensed for use by the Chicago Board Options Exchange, Inc. (CBOE). The "Russell 2000 Index is a registered trademark of Frank Russell Company. The Nasdaq 100 is a registered mark of The Nasdaq Stock Market, Inc. The Dow Jones Industrial AverageSM is a product of Dow Jones Indexes, a licensed trademark of CME Group Index Services LLC ("CME"), and has been licensed for use. "Dow Jones", "Dow Jones Industrial AverageSM", "DJIASM" and "Dow Jones Indexes" are service marks of Dow Jones Trademark Holdings, LLC ("Dow Jones"), have been licensed to CME and have been sublicensed for use for certain purposes by Chicago Board Options Exchange, Incorporated ("CBOE"). CBOE's options based on the Dow Jones Industrial AverageSM are not sponsored, endorsed, sold or promoted by Dow Jones, CME or their respective affiliates and none of them makes any representation regarding the advisability of investing in such product(s). LEAPS, FLEX, FLexible EXchange, CBOE, Chicago Board Options Exchange and OEX are registered trademarks of CBOE, and Long-term Equity AnticiPation SecuritiesTM and SPXTM are trademarks of the CBOE.

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