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The ISE Options Overlay indexes provide benchmarks for investors looking to track the performance of a diversified portfolio of exchange-listed options utilizing the vertical spread strategy. As indicated by the name, each index solely includes option contracts on the SPDR S&P 500 exchange-traded fund (NYSE Arca: SPY).
The following steps are taken to select spread pair components for each index:
i) Establish total population of available SPY option contracts for the front and second month.
ii) Refine selection universe based on eligibility/liquidity requirements.
iii) Create all possible ATM vertical spread pairs.
iv) Create and equal-weight overall rank for each pair by calculating and ranking on various criteria based on factors such as strike spread and net credit.
v) Based on the sold leg of each spread, determine the distance away from ATM (money-ness).
vi) Allocate spread pairs along proprietary money-ness and expiration criteria.
vii) Apply an equal weighting to all spread pairs.
Index components are evaluated using bid/ask pricing. Midpoint pricing is used for the real-time and end-of-day index level calculation. The index is rebalanced monthly in conjunction with the regular options expiration calendar.