Linda, re:Index Options
I'm experienced at trading simple options but have never traded the S&P 500 and OEX. Can you tell me if there's anything special involved in trading such vehicles? Is there anything I need to know about them?
[Please pardon the intrusion.]
Regarding SPX and OEX options, these are a few distinctions worth noting:
* SPX options cannot be exercised until expiration; OEX options are similar to equity options in that they can be exercised at any time during contract life. (You may wish to research the distinctions of American v. European style options to understand the nuances.)
*Index options (both SPX and OEX) carry a larger margin -- or, Fed min -- requirement for short sales. For example, if you create a spread in equity options, most brokers require $5K (plus any point differential); for index options the requirement is $25K.
I raise the issue of margin requirement, because IMO this is particularly important given Don's (et al) prognosis. Here's an example for illustration:
Suppose you expect the market to rise early next week and decline starting Wed/Thurs; also, suppose you are holding Nov puts. One choice is to buy Oct calls -- risking: a)that the market does not rebound significantly, and b) time decay. An alternative would be to sell Oct puts on Monday, locking profits on your Nov puts; then, you could cover buying back the Oct puts at a cheaper price on Wednesday or whenever. (The risk is that you've temporarily sold further downside opportunity.) If you agree that the latter choice is superior, then equity options would offer a better rate of return, since less capital is tied up as margin requirement.
Hope this helps, and good luck.
Alan |
