INDEX OPTIONS
Index options track the performance of an entire market segment (a basket of stocks) rather than an individual stock. They are popular for diversifying risk and speculating on broad market movements.
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In the derivatives market, options trading allows you to capture a higher leverage. The options contract enables the holder to have the right to buy or sell an underlying asset. When this underlying asset is an index, it is called an index options contract. Let us learn about the index option, its definition, and how to capitalize on the stock indices.
With index option trading, three factors are crucial:
- Strike price
- Value of the underlying index
- The expiration date of the contract
The crucial types of option contracts are:
- Call options – Investors have the right but not the obligation to purchase the underlying index at the known strike price on or before the date of expiry
- Put options – Investors have the right but not the obligation to sell the underlying index at the known strike price on or before the expiry date
On the date of expiry, any one of the following events happens:
- The contract is settled by both buyer and seller
- Contract expires worthless