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1 July 1984 Financial Analysts Journal Volume 40, Issue 4

The Complete Options Indexes

  1. Walter L. Eckardt
  2. Stephen L. Williams

A performance index measures the return experienced by a holder of a specific option position. A parameter index reflects the behavior of variables considered to be important determinants of option values, hence option investment performance. A value index provides a measure of option value over time. Index values will not be economically meaningful, however, unless standardization techniques are used to control for variations in such contract terms as time to expiration and the difference between the stock price and the option striking price.

The Complete Options Indexes (COI) comprise value indexes for both calls and puts and a parameter index of implicit volatility. The indexes are based on standardized option series that are closely related to actual contracts trading in the marketplace. Used as inputs to investment decision-making, the COI numbers can provide valuable information.

Correlations between historical values of the indexes, the riskless return, dividend yield and stock market return underscore the predominant role of stock volatility in the determination of option value. Correlations between the level of stock prices and the level of index values suggest that high stock prices are associated with high values for option premiums. Increases in stock prices tend to be accompanied by decreases in option premiums and decreases in the assessment of stock volatility.

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