What is the OEX
OEX is the ticker symbol used to identify the Standard & Poor's 100 index of highly capitalized stocks, as well as options traded on that index.
It is similar to the SPX symbol representing the S&P 500 index and its options.
BREAKING DOWN OEX
The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks chosen from a broad range of industries. Each component stock is weighted according to the total market value of its outstanding shares. Therefore, the impact of a component's price change is proportional to the its market cap or market value, which is the share price times the number of shares outstanding.
The S&P 100 is a subset of the broader S&P 500 and tracks the performance of the some of the biggest stocks in the U.S. market.
Although it may not be as popular as the S&P 500, it remains an important benchmark for many money managers with money invested in the big, blue-chip arena. One of the criteria for the inclusion of a stock in the index is having options available.
OEX options were the original and standard for index options trading on the domestic stock market. Over time, options on the S&P 500 (SPX) passed them in popularity. Making it worse for OEX followers, the calculation for the Chicago Board Options Exchange (CBOE) volatility index, called the VIX, changed from using OEX options to SPX options in 2003. Traders can watch the old version via the symbol VXO.
Options give the holder the right, but not the obligation, to buy or sell the underlying asset at a specific price at or by a specific date. In the case of OEX options, it would be the right to buy or sell the S&P 100 index. Since an index is not a tangible item, OEX options settle for cash.
Traders use OEX options to hedge or speculate on the performance of the large cap segment of the stock market. Strategies, such as vertical spreads and strangles, are possible with OEX options just as they are with individual stock options.
For example, a money manager holds a portfolio of blue-chip stocks but is worried short-term market conditions could impact it in a negative way. The manager might hedge by buying an OEX put option with a near expiration as insurance in case the market drops suddenly. While the portfolio managed may not hold all 100 OEX stocks in the same proportions, the correlation between the two might be strong enough that the hedge makes sense.