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Index OptionsIndex Options
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Index options are puts and calls on stock indexes. Indexes are statistics that measure market performance. One example of an index is the Standard & Poor's 500. It incorporates a broad range of 500 stocks, 400 of which are industrial stocks, 20 transportation stocks, 40 utilities, and a handful of other stocks, including some non-U.S. stocks. The stocks on the S&P 500 are selected by committee. Index options let the investor capitalize on expected market movement or protect holdings in underlying instruments. In this case, the underlying instruments are stock indexes, whether broad equity indexes or narrow industry-specific indexes. These index options allow investors to get exposure to the whole market or a specific segment of the market with only one trade decision and often with only one transaction. Index options are unique in that they offer known risk to buyers. The index option investor must not lose more than the amount of the option, also known as the premium. They offer leverage in that the index option buyer can, for a small premium, buy exposure to the overall market in relation to a contract value. Small index moves in an advantageous direction can result in large percentage gains. But if the index doesn't behave as expected, the risk is limited to only the premium that has been paid. It's important to remember that because of the leverage, small unfavorable percentage moves in a market can result in loss of most or all of the buyer's premium. |
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Index Options
