584 Part V: Index Options and Futures 
The S&P 500 has more stocks, and while both indices are capitalization-weight­
ed, 500 stocks include many smaller stocks than the 100-stock index. Also, the OEX 
is more heavily weighted by technology issues and is therefore slightly more volatile. 
Finally, the OEX does not contain several stocks that are heavily weighted in the S&P 
500 because those stocks do not have options listed on the CBOE: Procter and 
Gamble, Philip Morris, and Royal Dutch, to name a few. There are two ways to 
approach this spread - either from the perspective of the derivative products differ­
ential or by attempting to predict the cash spread. 
In actual practice, most market-makers in the OEX use the S&P 500 futures to 
hedge with. Therefore, if the futures have a larger premium - are overpriced - then 
the OEX calls will be expensive and the puts will be cheap. Thus, there is not as much 
of an opportunity to establish an inter-index spread in which the derivative products 
(futures and options in this case) spread differs significantly from the cash spread. 
That is, the derivative products spread will generally follow the cash spread very 
closely, because of the number of people trading the spread for hedging purposes. 
Nevertheless, the application does arise, albeit infrequently, to spread the 
premium of the derivative products in two indices on strictly a hedged basis with­
out trying to predict the direction of movement of the cash indices. In order to 
establish such a spread, one would take a position in futures and an opposite posi­
tion in both the puts and calls on OEX. Due to the way that options must be exe­
cuted, one cannot expect the same speed of execution that he can with the futures, 
unless he is trading from the OEX pit itself. Therefore, there is more of an execu­
tion risk with this spread. Consequently, most of this type of inter-index spreading 
is done by the market-makers themselves. It is much more difficult for upstairs 
traders and customers. 
USING OPTIONS IN INDEX SPREADS 
Whenever both indices have options, as most do, the strategist may find that he can 
use the options to his advantage. This does not mean merely that he can use a syn­
thetic option position as a substitute for the futures position (long call, short put at 
the same strike instead of long futures, for example). There are at least two other 
alternatives with options. First, he could use an in-the-money option as a substitute 
for the future. Second, he could use the options' delta to construct a more leveraged 
spread. These alternatives are best used when one is interested in trading the spread 
between the cash indices - they are not really amenable to the short-term strategy of 
spreading the premiums between the futures. 
Using in-the-money options as a substitute for futures gives one an additional 
advantage: If the cash indices move far enough in either direction, the spreader could