I can't tell from your post what the confusion might be. Though, the 490 calls with cash closing at 500 are 10 points ITM, not OTM. This means that the owners of the 490 calls may cash in that $10 at any time before 3:20. Typically they wouldn't this, since the 490 call premium would have vol value on top of intrinsic value. Let's say that the NYC bomb drives spu futures down 30 points. That would equate to somewhere between 10 and 15 points in the sp100 index. If the sp100 index is now priced at 485 from that drop, the 490 calls will definitely be worth less than $10, resulting in astute owners exercising their options. (As far as I know, there is no other early exercise that works this way.) Therefore the owners of the OEX 490 calls will exercise their options, effectively cashing them in for $10, as these contracts will be worth far less than $10 by the open. Let's say you are short 10 OEX 490 calls in your position. If 100% of the OEX 490 calls get exercised in this situation, you will be assigned on all 10 your short calls, forcing you to effectively buy back your shorts for $10 per option. If the options open the next morning for $3, you will have lost $7 over 10 contracts, or $7 thousand on the OEX early exercise risk.
If you want to see what types of moves equate into an early exercise, google: OEX pro rata. There will be a link to a daily file that the CBOE puts out around 6pm each night. The file will tell you the options and % exercised. Go through past files and check out the options exercised. You will find that as options get closer to expiration, it takes a smaller move to result in an early exercise. Also, the only difference between OEX and XEO is the early exercise risk. Therefore you can tell how much premium the early exercise risk adds to an option by comparing the XEO and OEX options markets. You might find anywhere between .40 and $3 of early exercise premium in a 100 delta OEX option, depending on how much time to expiration remains. An ATM option might have anywhere from 10 to 50 cents of early exercise value.
I certainly appreciate all this info. Cannot absorb it yet. I did get that I should be trading XEO options instead of OEX. As far as SPX options I dunno? I've got other things going on in my life. Mostly construction going on. So the hours I spend are usually at night trying to clear up stuff. I did get that trading E mini futures is a directional play and probably should be the way I should go. In the meantime, this Wednsday I put on a CREDIT SPREAD. Might as well go for broke for something to do. At least I understand now what I'm doing and the risk, at least with OEX credit spreads. Plan to put on the Thursday Friday Friday credit spread trade as well, may be the Iron Condor? I thought I was looking at Emini options, now I'm not at all sure that is what I had? It might have been stock, using Options House option chains. Anyway I didn't understand it, with the .25 to 5.0 scale for options instead of strikes. I did a couple of hours comparing GREEKS with index action in the OEX, but not getting anything out of them so far. My own way of doing them, to get an EDGE is to identify earlier in the new trend and get the options BEFORE premium ballooning happens. ( implied volatility increases ) This usually starts to happen after you get some other confirmation technical signal. Usually 25% to 35% of the trend has passed by then. I notice then both GAMMA and DELTA increase. I don't see it forecasting anything, or like a prophecy though? Which is somewhat like what Cache Landing was talking about? I did run across somebody that uses the E mini futures chart to forecast day trading options in stocks like Apple today. That was an interesting read and I remember doing something similar a decade and a half ago, with two windows open on one screen. One for a chart of the SPX and one for a chart of the OEX. That was a long time ago. Unfortunately in moving around, I've lost my old book HTML for DUMMIES and the codes used to import charts that were easy to read back at that time. I had some nice self designed web pages once long ago. Now I live in foreign lands and in the boondocks to boot, that stuff is not so easy to get anymore. I believe I'm going to have to get a FUTURES BROKER to find out how that works? Non of my two option brokers seem to work, or if they do, I am not understanding what I'm seeing? Anyway it keeps the juices flowing. There has to be a way to make more money? Trading long options in the OEX doesn't seem to do it anymore? I wonder if the spread has widened since more than a decade ago? It seems to take a lot more of a move to go past breakeven. Or is that my imagination?
Have you looked at the weekly SP500 options (available at IB by selecting EW-week number)? The 2 week aways (Aug. 13 or EW2) earlier in the week could be sold for much better premium than 2x the EW1 (Aug. 6 or this Friday) expiring options. The ES (50x times the SP500 index) options exercise into liquid futures (trade with good volume 24 hours during the week). The two week away options do not have much volume but seeming will fill at mid point of the bid-ask spread. I think there is currently a good opportunity in the two week away options because intuition may be able to beat the various option mathematics (programs). For example, should the weekend days be included in the decay calculation or not? I am short normal Aug. ES calls as hedges and short EW2 put options. I think there is a reasonalbe chance the market will stay high until next week then will tank into monthly option expiration week. If that happens, I will make money on both sides.
Jerkstore, Can you explain how you determined the "50%" and "40%" risk numbers that you put up here? Are these just sort of back-of-envelope numbers you're providing based on your feel, or something structural in the contract itself? I don't understand why the e-mini option has less risk than the full contract option?
Thank you very much VANV0029 Your comments are intriguing. I confess outside of stocks and OEX options I have no experience. Most of this stuff is entirely new to me and has it's own jargon and technicalities. You just introduced me to something new, the 1 week and 2 week, ES futures I believe? Never heard of them before. IB I take it from some other messages is a futures broker? I will try to check on that over the next couple of days and see what they have to offer? I do appreciate your input. I kind of like weeklies! Short and fast and a time frame to limit your trading. At this point I don't know what Ew2 is, or EW1, though I'm guessing this is options on ES futures? I will probably find it I suppose if I sign up with the broker IB?
Jerkstore â You are 100% correct with being 10 points ITM, my mistake. I also now realize your point with OEX. For whatever reason I thought you were referring to exercising the option on expiration day and then you went into taking about its opening price I was confused but you were referring to OEX on any non-expiration day. My mistake, again. Thank you for pointing this fact out.
Structural. The e-mini future makes/loses $50 per point, whereas the big future makes/loses $250 per contract/point. Since one option contract exercises into 1 future contract in both places, the e-mini multiplier is 50, while the CME big-spu option multiplier is 250. The CBOE SPX cash index options have a multiplier of 100. This e-mini options to SPX cash options to CME big SPU options is a 1:2:5 ratio. In other words, one hundred delta option would make/lose $50:$100:$250 per underlying point move in the emini/SPX cash/SPU future respectively.
Looks like my late Wednesday spread will make money the end of today. About a $1000. I did not get an Iron Condor at noon yesterday. I had gone out to the hammock from my trading room and fell asleep in the pleasant sunshine and so when I came back in, it was AFTER the noon hour and the premiums had decayed so fast that I missed it. They were zero on one side and .05 cents on the other. So I declined and watched it for an hour, but the speed of time decay said the opportunity was over. I should have been awake and jumped in a half hour before the noon hour. Now I'm glad I made the Wednesday closing spread trade. I need to recalculate my idea of an OUT THE MONEY, bets, on a WEEKLY chart bar. Somehow I have to start earlier in the week, preferably Monday when premiums are fuller. Need to get more premium, or cash. When I first did it, I was allowing 15 pts, on the OEX, or three strikes each way. But got frightened twice, ( 12 weeks amateur experience) so then I switched and started legging in after the OEX had moved one strike. That apparently sometimes works? However on a big move day, it can backfire and in credit spreads YOU NEVER WANT TO LOSE. Disastrous! I don't mind the Bear market plunges, because I only do Vertical Credit CALL spreads then. 1) IB is apparently a futures broker? Can anybody tell me the full name? Going to look it up for the E mini futures trading. Do they have a sim program? 2) Does anybody have any experience trading Vertical debit spreads? I'd like to know in the OEX what amount of movement is necessary to make any money after breakeven. 3) Does anybody know of an option software on line FREE, that can let me enter; interest, implied volatility and pre calculate the amount of index moves, whether the OEX or any other like the E Mini to see how far the underlying index has to move to breakeven? Appreciate that. I've run across a couple online, but not seemingly very good. I no longer have my option softwares I used to have from years ago and of course computers have been changed a number of times. So the files have been lost. I rather liked Ken Tresters 20 year ago early option software I had a CD for. Don't want to blow $250, or whatever, for another copy now I'm back in the game.
Maybe I'm typing in the E minis wrong? I've been typing in ES and then click GO! Should I be typing in Ew2, or Ew1, or whatever. I have to look this up in the CME website again. What is your experience in doing this? Save me some legwork here.