Trading OEX Options: The Risk Of Early Exercise.
One of the more popular strategies among individual investors is covered call writing: the investor buys 100 shares of stock and sells one call option, granting someone else the right to buy that stock at a specific price, known as the strike price, for a limited time. Often, the option expires worthless and the investor keeps both his or her stock and the option premium. (If you need a quick refresher on this strategy, see The Basics Of Covered Calls. )
However, sometimes the option owner exercises the option and the investor is assigned an exercise notice, obligating him or her to sell the stock. This achieves the maximum profit available when writing covered calls.
Unfortunately, too many investors fear being assigned that exercise notice. Because they are uncertain, they may believe someone cheated them because the stock is trading above the strike price.
There is no rational explanation for that fear. In fact, being assigned early can sometimes benefit option investors except in one case: OEX options. Read on to learn more about early exercise and why OEX is the exception to the rule.
If you trade spreads (buy one option and sell another), then being assigned an exercise notice does not adversely affect your overall position. You lose nothing.
In fact, assuming your account has sufficient margin to carry the position, receiving an assignment notice before expiration can turn into free money on occasion because of additional profit potential. In other words, if the stock suddenly drops below the strike price, every penny of that decline below the strike is extra cash in your pocket - cash that you couldn't earn if you were short the call instead of stock.
The above is a rather lengthy explanation of why being assigned an exercise notice should never be a concern.
But, as mentioned above, there is one important exception - and that occurs when you sell OEX options. These options are cash-settled, American style options. All other actively traded index options are European style and cannot be exercised prior to expiration. (To learn more, read Exploring European Options and American Option Investors: Should You Go Euro? )
Why is OEX an exception? And what's the big deal about being assigned an exercise notice before expiration arrives anyway? Didn't we just learn that the individual investor shouldn't fear early assignment?
When using equity options, if you are assigned on a call, the option is canceled and, instead, you become short 100 shares of stock (or you lose 100 shares of stock that you own). As such, your upside risk is unchanged, but your potential downside profit is increased.
Everything changes, however, when you are assigned early and the option is cash-settled. Let's take a look at why this happens:
When assigned on a cash-settled OEX option, you are obligated to repurchase the option at last night's intrinsic value. (We'll take a look at how this works in the example below.) You don't learn that you have been assigned until the following morning, before the market opens for trading. Your position changes. You are no longer short the option because you were forced to buy it - with no advance notice. When trading equity options, the call option you were short is replaced with short stock. Upon assignment, a short put position is replaced with long stock. But, when assigned on a cash-settled option, the option position is canceled and there is no replacement. This assignment notice often occurs as a surprise to the option rookie, who not only doesn't understand why anyone would exercise the option before expiration, but also probably doesn't know that early exercise is possible.
Let\'s say you decide to take a bullish position and sell an OEX put spread (which makes money when OEX remains above the strike price of the option sold). Assume OEX is currently 560. (For background reading on spreads, read Option Spread Strategies .) Buy 10 OEX Jun 530 puts Sell 10 OEX Jun 540 puts Collect $250 for each spread, or $2,500 total.
When you sell a put spread similar to this example, you collect a cash premium, and that cash represents your maximum profit. Under normal circumstances, when you hold this position, either both options expire worthless and you earn $250 profit, or you exit the position by selling the options you own and buying the options you sold. Depending on the cost of exiting the position, you have a profit or loss. This is straightforward.
How much can you lose if the market doesn\'t go your way? When both options are in the money when expiration arrives (OEX under 530 in this example), you must pay $1,000 to close the spread (the difference between the strike prices x 100). You collected $250 upfront, so your loss is $750 per spread. That\'s your maximum loss for the position - at least in theory.
The announcement takes everyone by surprise. Stocks have stopped trading for the day on the NYSE, but after-hours trading is taking place and stock prices are higher. Stock index futures soar, indicating that the market is expected to open much higher tomorrow. The OEX calls increase in price as everyone wants to buy. Similarly, puts are offered at lower prices. The bid/ask prices for the options change, but the OEX has an official closing price of $540. The index price ignores after-hours trading.
The OEX Jun 540 puts (your short option) was $40 before the news, but now the bid has dropped to $28. No one will sell that option at that price. Why? Anyone who owns the put can exercise it and receive the option\'s intrinsic value (strike price minus OEX price), or $40. (For more insight, see Understanding Option Pricing .)
When you get home from work and hear the news about interest rates, you are elated. What a lucky break for you! If the rally continues and OEX moves above 540, you will earn a profit from this position.
You eagerly open your computer the following morning. Sure enough, the DJIA futures are 250 points higher. But, when you look at your online brokerage account you notice something unusual. Your OEX position shows that you are long 10 Jun OEX 530 puts, but there is no position in the Jun 540 puts. You don\'t understand, and immediately call your broker.
The customer service rep tells you to look at your transactions for yesterday. You know you didn\'t make any trades, but there it is – right in front of you: You bought 10 Jun OEX 540 puts $40.
You carefully explain that there must be some mistake because you didn\'t make the trade. That\'s when the rep tells you that you were assigned an exercise notice that obligated you to repurchase those options at last night\'s intrinsic value. With the OEX closing price of 500, you must pay $40 for each option. The customer service rep tells you he\'s sorry, but nothing can be done. He asks why you failed to exercise your Jun 530 puts when the news was released. But perhaps you didn\'t know you could do that.
Your spread is gone. All you have left is 10 Jun OEX 530 puts. When the market opens and OEX is 515. There\'s no reason to gamble by holding the puts, so you unhappily sell the OEX Jun 530 puts, collecting $15 for each. You thought your maximum loss for the trade was $750 per spread, but you paid $25 to close the spread (pay 40, sell at 15) and thus lost $2,250 per spread ($2,500 to close the position minus the amount you collected for the spread at the beginning, which in this case was $250 per spread), or $22,500 when you account for entire position of ten contracts. Ouch!
Protecting Yourself from Early Exercise.
It's too late to do anything in the imaginary scenario above, but now that you understand the problem, there are two good alternatives:
1. Don't sell OEX options.
2. Trade one of the other indexes that are cash-settled, European style.
In these cases, you cannot be assigned an exercise notice prior to expiration and this unhappy event won't ever happen to you. (For further reading, see Vertical Bull and Bear Credit Spreads .)

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OEX Options Breakout.
Daily Call/Put Recommendations.
Let's be realistic - most option traders lose money. Have you ever consistently made money trading options? We don't mean for a few days or a few weeks. Are you booking profits trading options over the course of months and perhaps years? That's the true gauge of options trading success.
There are a lot of variables that cause people to lose money trading options. Probably the number one cause of losing money while trading options is not being disciplined. Protective stops are designed to stop the bleeding when a trade has gone wrong. The problem is that a lot of traders ignore their stops and by doing so they simultaneously become gamblers instead of investors.
If you're using a lot of 'hope' in your trading and if you're leaning into the computer screen watching the price of your option go down this means you've already lost the game. Why not pull the plug and start over? That's sort of what protective stops do.
On the opposite side is greed. If you're in an option and the position has reached your predefined objective and you're once again leaning into the computer screen cheering as the price climbs then your successful days are numbered.
There's truly no room for emotions, good or bad, when it comes to investing. You have to think objectively at all times and remove the excess fluff. The leading reason why people unintentionally incorporate these emotions in to their discipline is because they're under capitalized (under-funded). If the butterflies are churning in your stomach then you've taken on way too much risk.
The problem is that people are attracted to the leverage afforded by trading options. Where else can you take a few hundred dollars and potentially generate double digit returns in a matter of minutes or hours? With potential reward there's always risk. Las Vegas, or other gambling cities, is where you should gamble if your heart desires. But your online trading account is not your personal casino and you shouldn't treat it that way. Become a disciplined options trader and make a real difference in your options trading.
Limit how often you trade and stop over trading. Over trading probably ties in first place as the leading cause of failure in options trading. Do you really believe that all of these brilliant minds on Wall Street are going to actually open up the window of opportunity multiple times every day? Isn't that how money is really made? We need opportunities to develop that really shouldn't exist in the first place (perfect market). On most days the market doesn't provide 'loopholes' for us to capitalize on. The market is designed to be a place for buyers and sellers to trade and sometimes exceptional opportunities develop for one reason or another.
Our job is to spot those opportunities and present them in an easy to understand manner to our paying members. Because these kinds of abnormalities in pricing don't occur every day this means we won't be able to trade every day and you should adhere to this same kind of discipline. The market makers will happily cater to your excessive trading style in exchange for a tidy sum of your account balance. Shake off those bad habits and let us show you how hundreds of day traders are successful at options trading.
Strategy Results.
Click Year for prior results:
Subscription Plans.
Market Analysis Daily Call/Put Recommendations Pre-Market News Update Daily Options Key Levels Guidance Selective (no over trading) High Probability Trade Set-ups No Overnight Exposure Two Exit Parameters Excellent Support Experience - Founded 1999.
Contracts Traded.
S&P 100 Index Options.
Category: Index Options.
Underlying Root: $OEX. X.
How it works:
Each day we post the daily Call/Put recommendations for the monthly OEX options in the "Members Only" section of our web site.
We give you two exit methods +2 and End of Day. The objective of this system is to identify significantly bullish or bearish sessions and buy call or put options and hold those positions while the market trends throughout the day and then exit those positions at the close and have zero overnight exposure.
We've developed this system so that you're prepared in advance and always know when to expect an entry . In the past our members had to wait until a signal developed and then they were alerted after the fact. Today we give you an edge by providing the signals before the open so that you have the best opportunity to succeed.
Buy OEX April 640 Call Options on a.
Break Above OEX 638.75.
If Filled, place a stop at 636.75.
These are the exact parameters members receive prior to entering an OEX position . This signal alerts members to buy the April 640 Call options when the OEX index moves above 638.75. In the trading room we stream the real - time Call and Put option prices so you will be able to note the real-time price of those options when the OEX index triggers an entry signal.
There are two simple exit methods that can be used. Historically we've targeted a 2 point index move. This works well because we choose options close to a 50% delta which means a 2 point index move should get us roughly $1 in option profits and this should be around a 10% or higher profit.
The second method is to simply use no profit target and hold the position until the closing bell and then exit the position. The choice is entirely up to you. In some market conditions one method may work better than the other (choppy markets the 2 point objective will work better while in more volatile settings the no target objective may produce greater results). Some members may choose to employ a combination of the two.
Each day we also a " Pre-Market New Update " before the markets open.
We also our " Options Key Levels Guidance Report " 30-60 after markets open each day so you will know the Support/Resistance indicators for each days trades.
Totals stated in results are based on strategy models designed to track daily entry recommendations. Slippage and commissions are not included in calculations. The projections or other information generated by OEX Street regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary with each use and over time. Guidance provided is educational. Before investing in any exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses.
About OEX Street.
OEX Street has published real-time trading strategies on the web since 1999 making us one of the pioneers in the industry. Though, we teach and preach conservative methods, fantastic leverage is possible with options.
Recent Updates.
Check out our updated Nutus 3.0 E-mini auto-trading strategy now including S&P, TF, EC and CL markets via our "sister" company called EminiFutures. Auto - trading futures has never been easier.
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