Saturday, March 20, 2010

OEX Weekly Historical Behaviour

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Following on from the results of the OEX monthly average percentage move, I am also investigating on the trading the strategy using the OEX Weekly options.

CBOE broke new ground in October 2005, when it introduced "Weeklys", a new type of option. Weeklys are one-week options as opposed to traditional options that have a life of months or years.

OEX Weeklys:
One-week, American-style options on the S&P 100 index with Friday P.M. settlement (last day of trading is a Friday).

Having also downloaded the OEX Weekly closing prices, I was able to calculate the absolute weekly move for the OEX as well as the absolute percentage move. On average the OEX moves about 3% (2.27% to be exact) per week up or down.

In following the entry criteria for the monthly strategy, we can select our strikes (long/short) strikes based on our own risk appetite and this percentage move.

The 3% OTM rule can either be the long strike (for conservative traders) or the short strike (for aggressive traders) .

As an example, with the OEX Friday closing price at $530.53, 3% OTM would be $546.45 for the upside move and $514.61 for the downside move.

Based on these values, we can create the ratios or BWBs at option strikes around these values.

For a downside move a conservative trader could look at the following strikes:
Long 515
Short 510
Tail (at their discretion based on margin and/or risk reduction requirements)

An aggressive trader could look at the the following strikes:
Long 520
Short 515
Tail (at their discretion based on margin and/or risk reduction requirements)

As the options expire within 1 week, these strikes are placed in a 1:3:2 ratio, for reasonable credit and margin held.

I am monitoring the liquidity of these Weekly options as I am seeing huge bid/ask spreads and low open interest on the current set of Weekly options which were released on Friday. I will check on Monday whether the bid/ask spread has tightened and open interest has increased.

--  randomjaywalking


Western Belize Happenings! said...

I'm looking at OEX option weeklies. Having trouble finding a broker Who does them? My Option House does not.
Did you have any luck using Spreads on weeklies?


randomjaywalking said...

Hi Ray,

I use TOS ( they include the OEX Weeklies in the option chain. They are released every Friday (except for the Friday before expiration week).

With the VIX at historical lows, there were no trades on the OEX weeklies that fell into my criteria that i use for BWB spreads.