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OEX Monthly Historical Behaviour

Options involve Risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD"). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and Margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.

There is an entry criteria in the strategy that we follow for Ratio spreads and BWBs that state that the best ratios are often found 5% OTM from the current underlying price. I initially took this as gospel and it was not until I was sweating out the March 1:5:4 Call BWB that I realized the exact reason why this 5% number was given as part of the entry criteria (and why I should have followed it!)

The OEX historical monthly close prices are available for download from the CBOE website. The data is available from 30-Jun-1986 until 30-Oct-2009.

I took the closing prices and worked out for each month how much the OEX moved up or down. I then took the absolute movement per month and worked out the percentage of the move from the previous month. Averaging out the Percentage Move over 280 months, the results came back as 4% or 3.55% to be exact.

This means that on average, the OEX moves about 4% in either direction. By having this average percentage move, backed by historical data, allows us to select our strikes (long/short) strikes based on our own risk appetite.

The 5% OTM rule can either be the long strike (for conservative traders) or the short strike (for aggressive traders) . This was further clarified by my conversation with the veteran ex-floor trader (see previous post).

As an example, with the OEX Friday closing price at $530.53, 5% OTM would be $557.06 for the upside move and $504.00 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 505
Short 490
Tail (at their discretion based on margin and/or risk reduction requirements)

An aggressive trader could look at the the following strikes:
Long 515
Short 500
Tail (at their discretion based on margin and/or risk reduction requirements)

These strikes could be selected in a 1:2:1 ratio or a 1:3:2 ratio, although with the VIX being so low, getting good credits for the 1:2:1 ratio would most likely result in debit trades, those with an aggressive appetite could go for the 1:3:2 ratio at reasonable credits and reasonable margin held.

-- randomjaywalking

This post first appeared on A Boring Way To Make Consistent Profit From Tradin, please read the originial post: here

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OEX Monthly Historical Behaviour


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