Index option

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Index option

Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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