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Index Options

Index Option: A call or put on a financial index. Just as stock options are defined as contracts that give the buyer the right to buy or sell a stock at a stated price for a limited period of time, cash–settled index options give buyers similar rights. However, the underlying asset covered by index options is not shares in a company, but rather, an underlying dollar value equal to the index level multiplied by $100. The amount of cash received upon exercise or at expiration depends on the settlement value of the index in comparison to the strike price of the index option.

Investors trading index options are essentially betting on the overall movement of the stock market as represented by a basket of stocks. Options on the S&P 500 are some of the most actively traded options in the world.

An option, presents a world of opportunity to sophisticated investors.

The power of options lies in their versatility. They enable you to adapt or adjust your position according to any situation that arises. Options can be as speculative or as conservative as you want. This means you can do everything from protecting a position from a decline to outright betting on the movement of a market or index.

This versatility, however, does not come without its costs. Options are complex securities and can be extremely risky. This is why, when trading options, you will most likely see a disclaimer like the following:
Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital.

Despite what many tell you, option trading involves risk, especially if you do not know what you are doing. Because of this, many people suggest you steer clear of options and forget their existence.

On the other hand, being ignorant of any type of investment places you in a weak position. Perhaps the speculative nature of options does not fit your style. If not then do not speculate in options. But, before you decide not to invest in options, you should understand them. Not learning how options function is as dangerous as jumping right in: without knowing about options you would not only forfeit having another item in your investing toolbox but also lose insight into the workings of some of the world”s largest corporations. Whether it is to hedge the risk of foreign–exchange transactions or to give employees ownership in the form of stock options, most multi–nationals today use options in some form or another.

One of the most widely read books among active option traders around the world, Option Volatility & Pricing has been completely updated to reflect the most current developments and trends in option products and trading strategies.

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