Index option

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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 ?
November ADV in index options decreased 15 percent from October 2015, but increased 14 percent from ADV in November 2014.
Hong Kong Exchanges and Clearing said it plans to introduce Flexible Index Options in the first quarter of next year, pending regulatory approval.
More adventurous investors use stock index options to protect their portfolios against stock market corrections.
It occurs with the concurrent expiration of groups of stock index futures, stock index options and options on individual stocks.
NEW YORK -- The International Securities Exchange (NYSE:ISE) today reported that average daily trading volume for equity and index options contracts for August 2007 increased 74.
The listing of the new FTSE 100 and FTSE China 50 Index options are part of a licensing agreement forged by CBOE and London Stock Exchange Group (LSEG) in February 2015 (see February 26 press release).
On July 26, 2007, ISE set a record for daily trading volume of 6,226,821 equity and index options contracts, surpassing the previous record of 5,531,875 contracts set on February 27, 2007.
October ADV in index options decreased 16 percent from September 2015 and 26 percent from the record ADV in October 2014.
Tournant's group managed over $3 billion in equity index options strategies including the option overlay of the NFJ Dividend, Interest & Premium Strategy Fund (NYSE:NFJ).
September ADV in index options increased 36 percent, while exchange-traded product (ETP) options decreased 7 percent and equity options decreased 36 percent versus September 2014.
Numerous trading records were set at CBOE Holdings in August, including new single-day volume highs for CBOE, C2, total index options and S&P 500 Index (SPX) options, and new monthly average daily volume (ADV) records in CBOE Volatility Index[sup.
New global products will include: Asia ex-Japan (AEJ) share and index options, AEJ share and index swaps, AEJ share and index variance swaps, and Japanese index variance swaps.