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.
