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The S&P 100 ($OEX) is the first index to have options linked to its performance.  In 1983, ten years after the launch of stock option trading, the Chicago Board Options Exchange [CBOE] started trading options on the OEX.  More recently, the CBOE developed two other ways to trade the S&P 100.  In the past two years, the exchange has started trading options on the iShares S&P 100 (OEF) and the S&P 100 European-Style Index ($XEO).  While the OEX, XEO, and OEF are all unique in certain ways, the values of the options on all three products are derived from the S&P 100 Index.  Therefore, understanding the ins and outs of the S&P 100 can help traders not only get a better sense regarding what is happening within the market, but also make better trading decisions when implementing strategies on the OEX, OEF, or XEO.

The OEX, XEO, and OEF options have one important factor in common.  The value of all three option contracts is derived from the S&P 100 Index, which is an index consisting of one hundred of the largest stocks from a broad range of industries.  In addition, the creators of the index (Standard & Poor’s Corporation) require that all stocks within the S&P 100 also have listed options.  So, the OEX, XEO, and OEF options are all based on the value of the S&P 100 Index, which is an index consisting of 100 of the largest stocks with options listed on the US options exchanges.  

The iShares S&P 100, or OEF, is significantly different from both the OEX and the XEO.  Options on this investment vehicle were launched in February 2001. In addition, the OEF is not an index, but an exchange traded fund [ETF].  Therefore, like other ETFs, iShares can be bought and sold like a stock, which is not possible to do with the cash-based XEO and OEX.  Consequently, settlement of OEF options also takes place like stock options.  That is, settlement involves the transfer of shares, and not cash.

The XEO differs from the OEX in only one way.  Both are cash-based indexes.  Meaning, the options settle for cash (not shares like with stock options).  However, the way the OEX and the XEO settle is different.  Prior to the launch of OEX options 1983, option strategists were limited to trading stock options.  Just like today, all stock options settled American style, which means that exercise can take place any time prior to expiration.  Naturally, then, when OEX options began trading, they also settled American style.  However, many index options today, like the XEO, have been created to settle European-style, which means that exercise and assignment can only take place at expiration.  Therefore, the XEO is simply a way of trading the OEX, but the risk of early-assignment for option sellers is removed.    

Whether trading the OEX, OEF, or XEO, it is sometimes helpful to consider the individual components of the S&P 100 index.  Recall that indexes are nothing more than averages.  That is, they consider the average price of a basket of stocks.  For instance, the S&P 100 Index is a basket of 100 of the largest stocks trading on the US stock exchanges.  However, it is not computed using a simple average or mean.  Instead, it is created using a market-weighted method.  These so-called “cap-weighted” indexes like the S&P 100 are computed by adding together the market values (price times shares outstanding) of the index’s components.  Then, an index value is computed using a divisor.  The cap-weighted method has been the more common method of constructing indexes through the years.  Well-known indexes such as the S&P 500 Index ($SPX), the Nasdaq 100 ($NDX), and the PHLX Gold Mining Index ($XAU) are examples of cap-weighted indices.

If the market value, or capitalization, weighted indexes are constructed so that the largest companies (by market capitalization) hold a greater weighting within the index, then the performance of the biggest companies within the average will have a greater impact on the performance of the total index.  Notice from the table below that the top 30 stocks within the S&P 100 Index include big companies like Microsoft (MSFT), General Electric (GE), and Intel (INTC).  Together, these thirty stocks combine to equal 75% of the S&P 100 Index today.  So, 30% of the stocks in the S&P 100 represent three-quarters of the index’s total market value.

If a large percentage of the OEX is reflected in a relatively small number of stocks, it can sometimes be useful to look at the performance of the index’s individual components to make better sense of what is happening.  For example, to better understand what the future holds for the S&P 100, one might study the fundamentals of the top thirty S&P 100 stocks.  This might include things like earnings, price-to-earnings ratios, dividends, news stories, or analyst earnings estimates.

Alternatively, traders might want to look at technical trends with respect to the top thirty OEX stocks.  For instance, many of the top thirty OEX stocks have recently been rising above their 50-day moving averages.  As we can see from the table, 80% of the top thirty OEX stocks are above their 50-day moving averages.  In addition, a large number of those stocks (20) have moved above their 50-day moving averages in the past ten days.  As we can see from the chart below, Intel has been among them.  It has recently risen above its 50-day moving average (on March 14) and its 200-day moving average (on March 17).  This can be a sign of a major trend change.   



Going forward, the direction of the individual components of the S&P 100 will determine the price changes and volatility of the OEX, XEO, and OEF.  A few of these stocks, like Hewlett Packard (HPQ), Cisco Systems (CSCO), and Verizon (VZ) have recently slipped back down below their 200-day moving averages.  This trend will be worth watching.  If a significant percentage of the top thirty S&P 100 begin to drop back down below their moving averages, it will indicate that the trend is once again shifting to the downside.

Moving averages are just one tool for looking at the trends with respect to individual stocks.  The same analysis can be repeated with other indicators like Bollinger Bands, P/E ratios, or point and figure charts.  The goal is simply to break apart the index and look at the individual stocks from a quantitative or technical perspective.  That, in turn, is relatively easy to do with the cap-weighted indexes because they are heavily influenced by a relatively small number of stocks.  


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
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