What do OEX Index Options Prices Really Track?

Options Trading Topic: OEX Index Option Valuation

Dear Options Trading FAQ:

I am an avid index option trader and I watch the OEX index and the OEX options very closely in live time on my computer. I notice that on some days, the options don't seem to track the underlying index very well - that is, sometimes the OEX will be up only a little yet the options are up a lot, and vice versa. Any thoughts?
Puzzled Option Strategist

Dear Puzzler:

Here's a Wall Street fact of life that a surprising number of people don't know:

Derivatives on various indexes are often skewed by things other than the underlying index in question. For example, the OEX options are usually NOT priced off the OEX index. The working pricing mechanism is, in fact, the S&P 500 futures as that is a better indicator of future expectations.

That is why on some days the options will show increases or decreases in value not in line with the OEX index. One should always be aware of where the S&P futures are - most of Wall Street watches it in a trend following fashion. The CNBC ticker shows it all the time, or you can just ask your broker when you call for quotes. The current contract to follow is the S&P 500 December futures contract. That's quite a mouthful so just ask how the December "Spooze" are doing. Keep track of it and you'll see a more true correlation to the index premiums that you watch.

Note: The current month options do strongly track their own underlying index on expiration day.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Index Options, Option Pricing

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