Stock Option Advisory

Trade Iron Condor for $OEX Same as for $XEO?

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.

$OEX vs. $XEO

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.


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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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]

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