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