Wednesday 14 September 2016

HOW TO TRADE IN INDEX OPTIONS

An index option is the same as equity or stock option, except the underlying asset is an index instead of a stock. Just like an equity call option, an index call option is the right to buy the underlying index. And just like equity put option, an index put option is the right to sell the underlying index.
In other words, an index option is a security that allows the owner to buy or sell an index at a specified price by a specified date. It is an "option" because the owner does not "have to" exercise the option, but rather decides based on the price of the underlying if they want to exercise it. Index options are defined by the following 4 characteristics:
  • There is an underlying index
  • There is an expiration date of the option
  • There is a strike price of the option
  • The option is either the right to buy or the right to sell (call and put, respectively)
The difference between calls and puts is the owner of an index call option has the right to BUY an index at a certain price. The owner of a put option has the right to SELL an index at a certain price.