At PowerOptions, we receive a lot of really good stock options related questions from our customers. A question we recently received related to our PowerOptionsApplied newsletter service was “can I trade your Iron Condors for $OEX just the same as for $XEO?”
American vs. European
The underlying for options for $OEX and $XEO are based on the same index, the S&P 100. However, options for the $OEX are American style and options for the $XEO are European style. American style options may be exercised early and European style options may not be exercised early.
For the Iron Condor positions we trade for the PowerOptionsApplied Optium and Chromium newsletters, we select positions which are initially significantly out-of-the-money and avoid allowing positions to go in-the-money. In this case, the $OEX or $XEO options may be used in a similar manner, as the likely-hood of an out-of-the-money option being exercised early is remote.
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However, the option prices for $OEX and $XEO will often differ. Additionally, the liquidity for the $OEX is much higher than for the $XEO. Typically, there is significantly more open interest and volume for the $OEX options than for the $XEO options.
Example
For example, consider an Iron Condor that was successfully traded for the PowerOptionsApplied Optium newsletter and was initially entered on 11/30/2009. The options entered for this position were the DEC 455/465 put options and the DEC 545/555 call options. We were able to receive a net credit of $0.60 for this position which represented a return of 6.4%. The net credit of $0.60 was received for the midpoint between the bid/ask for all of the options. For the $XEO options on the same day, it appears it would have only been possible to receive a net credit of $0.40, which represents a potential return of 4.2% which is significantly less than the 6.4% return experienced for the $OEX position.
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| Index | $OEX Iron Condor | $XEO Iron Condor |
| Net Credit | $0.60 | $0.40 |
| Return | 6.4% | 4.2% |
When It Matters
For certain strategies the difference between $OEX and $XEO with respect to American versus European style should be considered. For example, traders of Butterfly spreads which have two short options at-the-money should probably only enter positions for the $XEO index, as the short options may not be exercised for the European style $XEO index. With a Butterfly spread there is a high probability that one of the short options will move in-the-money which could result in the option being exercised and forcing a trader to compensate for the early exercise.
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Conclusion
Investors trading out-of-the-money short options, Iron Condor for example, for the S&P 100 can trade either $OEX or $XEO, however in most cases the potential returns possible will be greater for the $OEX than for the $XEO. However, traders seeking to trade short S&P 100 index options which are at-the-money or in-the-money should consider trading $XEO as opposed to $OEX in order to prevent an early exercise from occurring.
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PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.
[tags] OEX, XEO, European style, American style, out-of-the-money, at-the-money, Butterfly spread, $OEX, S&P 100 Index, $XEO, S&P 100 Index – Euro. Style [/tags]