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CBOE Special Feature -- OEX: The Original Index Option Contract

Russell Rhoads is an instructor with The Options Institute at the Chicago Board Options Exchange. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies and is the author of Option Spread Trading: A Comprehensive Guide to Strategies and Tactics. Russell also wrote Trading VIX Derivatives: Trading and Hedging Strategies using VIX Futures, Options and Exchange-Traded Notes. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois - Chicago and acts as an instructor for the Options Industry Council.

On Saturday, March 24, the CBOE, Option Pit and OptionsProfits are hosting a full-day course, The Professional Approach to Trading SPX. CLICK HERE FOR INVITE AND TO REGISTER.

Russell: Many of those new to options may be surprised to hear that at one time the king of index option contracts was the S&P 100 (OEX) Index. Introduced by the CBOE in 1983, the OEX was the original index option contract. Long before the focus of the index option world was on the S&P 500 (SPX and SPXPM) series, the OEX ruled the index world with hundreds of traders vying for position in the OEX pit. Back in the day, OEX options were considered so innovative that full books were written on how to trade these innovative products. Today, almost 30 years later, index options are a mainstay of the financial markets.

Although the SPX and SPXPM arenas garner a good portion on market attention, the OEX is still a viable option contract with several market makers posting electronic quotes as well as participating in open outcry orders throughout the day. The spreads are comparable to the SPX products, but there is a difference that some traders may find attractive. The OEX quote is usually about half the size of the SPX quote. For instance on March 6, the S&P 100 quote is about 610 while the S&P 500 quote is 1345. The result is a lower dollar amount when trading an OEX contract versus an SPX contract.

Although the quote is different, the SPX and OEX are highly correlated indexes. The OEX is comprised of 100 of the largest U.S. companies while the SPX is an index of the 500 largest public companies. Even though the OEX is made up of only 100 companies, the index actually represents over 50% of the equity market value in the U.S. and a very large portion of the value of the S&P 500 as well. The result is correlation between the two indexes of well over 90%. The chart below shows the SPX and OEX price performance for 2011.


A few weeks ago on Options Profits, I discussed the difference between SPDR S&P 500 ETF (SPY) and SPX options, with one major difference being that notional value of 1 SPX option contact is the same as that of 10 SPY option contracts. For some that is attractive while others that may be a bit intimidating. If the large notional value of the SPX or SPXPM contracts is a bit much for you, a consideration may always be taking a look at OEX options as an index alternative to trading SPY options. The ratio is roughly 5 SPY options to 1 OEX option contract.

In addition to the SPX and OEX pricing moving in lockstep, the implied volatility of both option series tends to move together as well. Before 1993 the CBOE Volatility Index (VIX) was actually calculated using OEX options. In 1993, the calculation was revised with one of the changes being a focus on SPX option contracts. The 'old VIX', using OEX option contracts, continues to be quoted with the symbol VXO. The chart below shows the relationship between the VIX and VXO in 2011.
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