S&P 100 Index Options

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S&P 100 Index Options

S&P 100 index options are option contracts in which the underlying value is based on the level of the S&P 100, a capitalization-weighted index of 100 leading U.S. stocks which are among the largest and most established companies in the S&P 500 index that have exchange-listed options.

The S&P 100® index option contract has an underlying value that is equal to the full value of the level of the S&P 100 index. The S&P 100® index option trades under the symbol of OEX and has a contract multiplier of $100.

Product Name Symbol Underlying Value Contract Multiplier Exercise Style
S&P 100® Options OEX Full Value of S&P 100 $100
(Full Contract Specs)
American
S&P 100® (European-style Exercise) Options XEO Full Value of S&P 100 $100
(Full Contract Specs)
European

How to Trade S&P 100 Index Options

If you are bullish on the S&P 100, you can profit from a rise in its value by buying S&P 100® (OEX) call options. On the other hand, if you believe that the S&P 100 index is poised to fall, then OEX put options should be purchased instead.

The following example depict a scenario where you buy a near-money OEX call option in anticipation of a rise in the level of the S&P 100 index. Note that for simplicity’s sake, transaction costs have not been included in the calculations.

Example: Buy OEX Call Option (A Bullish Strategy)

You observed that the current level of the S&P 100 index is 385.48. The OEX is based on the full value of the underlying S&P 100 index and therefore trades at 385.48. A near-month OEX call option with a nearby strike price of 390 is being priced at $25.70. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $2,570.00.

Assuming that by option expiration day, the level of the underlying S&P 100 index has risen by 15% to 443.30 and correspondingly, the OEX is now trading at 443.30 since it is based on the full value of the underlying S&P 100 index. With the OEX now significantly higher than the option strike price, your call option is now in the money. By exercising your call option, you will receive a cash settlement amount that is computed using the following formula:

Cash Settlement Amount = (Difference between Index Settlement Value and the Strike Price) x Contract Multiplier

So you will receive (443.30 – 390.00) x $100 = $5,330.20 from the option exercise. Deducting the initial premium of $2,570.00 you paid to buy the call option, your net profit from the long call strategy will come to $2,760.20.

Profit on Long OEX 390 Call Option When S&P 100 at 443.30
Proceeds from Option Exercise = Cash Settlement Amount
= (Index Settlement Value – Option Strike Price) x Contract Size
= (443.30 – 390.00) x $100
= $5,330.20
Investment = Initial Premium Paid
= $2,570.00
Net Profit = Proceeds from Option Exercise – Investment
= $5,330.20 – $2,570.00
= $2,760.20
Return on Investment = Net Profit / Investment
= 107%

In practice, it is usually not necessary to exercise the index call option to take profit. You can close out the position by selling the OEX call option in the options market. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, as the option sale is performed on expiration day, there is virtually no time value left. The amount you will receive from the OEX option sale will still be equal to it’s intrinsic value.

Limited Downside Risk

One notable advantage of the long S&P 100® call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the OEX call option.

Suppose the S&P 100 index had dropped by 15% instead, pushing the OEX down to 327.66, which is way below the option strike price of 390. Now, in this scenario, it would not make any sense at all to exercise the call option as it will result in additional loss. Fortunately, you are holding an option contract, and not a futures contract, and so you are not obliged to anyway. You can just let the option expire worthless and your total loss will simply be the call option premium of $2,570.00.

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    Index Option

    What is an Index Option?

    An index option is a financial derivative that gives the holder the right, but not the obligation, to buy or sell the value of an underlying index, such as the Standard and Poor’s (S&P) 500, at the stated exercise price on or before the expiration date of the option. No actual stocks are bought or sold; index options are always cash-settled, and are typically European-style options.

    Basics of an Index Option

    Index call and put options are simple and popular tools used by investors, traders and speculators to profit on the general direction of an underlying index while putting very little capital at risk. The profit potential for long index call options is unlimited, while the risk is limited to the premium amount paid for the option, regardless of the index level at expiration. For long index put options, the risk is also limited to the premium paid, and the potential profit is capped at the index level, less the premium paid, as the index can never go below zero.

    Beyond potentially profiting from general index level movements, index options can be used to diversify a portfolio when an investor is unwilling to invest directly in the index’s underlying stocks. Index options can also be used in multiple ways to hedge specific risks in a portfolio. American-style index options can be exercised at any time before the expiration date, while European-style index options can only be exercised on the expiration date.

    Key Takeaways

    • Index options are options to buy or sell the value of an underlying index.
    • Index options have downside that is limited to the amount of premium paid and upside that is unlimited.

    Index Option Examples

    Imagine a hypothetical index called Index X, which has a level of 500. Assume an investor decides to purchase a call option on Index X with a strike price of 505. With index options, the contract has a multiplier that determines the overall price. Usually the multiplier is 100. If, for example, this 505 call option is priced at $11, the entire contract costs $1,100, or $11 x 100.

    It is important to note the underlying asset in this contract is not any individual stock or set of stocks but rather the cash level of the index adjusted by the multiplier. In this example, it is $50,000, or 500 x $100. Instead of investing $50,000 in the stocks of the index, an investor can buy the option at $1,100 and utilize the remaining $48,900 elsewhere.

    The risk associated with this trade is limited to $1,100. The break-even point of an index call option trade is the strike price plus the premium paid. In this example, that is 516, or 505 plus 11. At any level above 516, this particular trade becomes profitable. If the index level was 530 at expiration, the owner of this call option would exercise it and receive $2,500 in cash from the other side of the trade, or (530 – 505) x $100. Less the initial premium paid, this trade results in a profit of $1,400.

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