Index option

Index option

Index Option

A call or put option contract in which the underlying asset is an index of any sort. For example, in a call, an investor may buy the right to an index on or before the expiration date at a certain strike price. Obviously, one cannot buy or sell a physical index, so the underlying asset is said to be the dollar value of an index at a certain date and time multiplied by $100. Because physical delivery is not possible, when a stock index option is exercised, the delivery is the cash value of the strike price. See also: Exchange-traded fund, Index fund.

index option

A call option or put option with a specific index as the underlying asset. For example, a call option on the S&P 500 gives the option buyer the right to purchase the value of the index at a fixed price until a predetermined date. Index options provide a means to leverage a bet on the future direction of the market or of a particular industry segment without purchasing all the individual securities. Use of the option can entail considerable risk for an investor.

Index option.

Index options are puts and calls on a stock index rather than on an individual stock. They give investors the opportunity to hedge their portfolios or speculate on gains or losses in a segment of the market.

For example, if you own a group of technology stocks but think technology stocks are going to fall, you might buy a put option on a technology index rather than selling short a number of different technology stocks.

If the value of the index does fall, you could exercise the option and collect cash to partially offset a drop in the value of your portfolio.

However, to use this strategy successfully, the index you choose must perform the way the portion of the portfolio you're trying to hedge performs.

And since changes in an index are difficult to predict, index options tend to be volatile. The more time there is until an index option expires, the more volatile the option tends to be.

References in periodicals archive ?
Index option Tips is especially designed for those traders who trade in index options.
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Leeb edited Personal Finance for more than 13 years and, until recently wrote Leeb's Index Option Alert, which was published by Allie Ash's KCI Communications Inc.
Before moving back to Erie to join the family business, Jeremy worked in the Chicago area for several years with the Chicago Futures Group, Futrex Trading LLC and as an equity index option market maker on the Chicago Mercantile Exchange.
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SINCE THE CHICAGO BOARD OPTIONS EXCHANGE INTRODUCED THE FIRST INDEX OPTION CONTRACT IN 1983, INDEX OPTIONS MARKETS HAVE HAD A SIGNIFICANT ROLE IN FINANCIAL MARKETS.
Equity investors tend to overpay for index puts to insure their portfolios, driving up index option prices and causing index option Implied Volatility to consistently exceed subsequent Realized Volatility.
CBOE offers equity, index and ETP options, including proprietary products, such as S&P 500 options, the most active US index option, and options and futures on the CBOE Volatility Index (the VIX Index).
Chicago-based CBOE Holdings offers equity, index and ETP options, including proprietary products, such as S&P 500 options, the most active US index option, and options and futures on the CBOE Volatility Index (the VIX Index).
The VXMT index joins CBOE's other S&P 500 Index volatility benchmarks the CBOE Short-term Volatility Index (VXSTSMindex), which measures nine days; the VIX index, which measures 30 days; and the CBOE 3-Month Volatility Index (VXVSMIndex) -- to create a live, streaming representation of expected volatility at key points along the S&P 500 Index option term structure.
The calculation of the CBOE Russell 2000 Volatility Index (RVX Index) is based on the CBOE Volatility Index (VIX Index) methodology applied to CBOE listed options on the Russell 2000 Index, the third most actively traded index option at CBOE in the first half of 2013.
CBOE, CFE and C2 each posted all-time record monthly volumes and average daily volumes in October, and several individual products including S&P 500 Index options and CBOE Volatility Index (VIX Index) futures and options set monthly and daily records.