Index Options Trading
Index options provide the investor an occasion to take advantage of an anticipated market move, or to shield holdings in the underlying instruments just like the equity options. But in the case of index options, the underlying instruments are indexes.
A contract equates $100 (the index multiplier) multiplied by the index level.
Premium Quotations: these are stated in decimals and points – a point equals $100. For series trading less than 3, the minimum thick is 05 ($5.00), while .10 ($10.00) is the least tick for all other series.
Strike Price Intervals; to bracket index present value, index options are generally listed at 5 points intervals. The outcome of higher index values may be larger strike price intervals. However, the investors need to contact their Exchange for specific information.
In general, Index LEAPS listing is made in 2.50 point intervals. In the far-term months, SPX options are likely to be listed with about 25 point intervals, while the listing of OEX options is made in 10 point intervals in the far-term month.
JPN options that have over 1 year expiration are listed in 50 point intervals. For WSX options, 2.50 points intervals may be obtainable.
Index options are either American-style structured, or European-style structured. The American style may be exercised on any business day preceding expiration.
On the other hand, it is only on the last trading day preceding expiration that the European-style options can be exercised.
Expiration date is the immediate Saturday to the 3rd Friday of the expiration month.
The settlement price is calculated as the $ difference between index number and the contract’s strike price times 100. However, you may check specific information since different means of achieving the calculation may be available.
Time for Exercise Settlement; the tendering of exercise notifications will result to cash delivery on the next business day.
Hours of trading; 9:30 a.m. to 4:15 p.m. (Eastern Time) – broad-based indices; 9:30 a.m. to 4:00 p.m. (Eastern Time) – industry specific indices; 8:30 a.m. to 11:30 a.m. (Eastern Time) – EUR.
Index Options Benefits
Index options create opportunity for investors to be exposed to the entire market, or to particular sectors of the said market with single trading decisions or often with single transaction.
To get similar levels of diversification with individualized equity option classes, or individual stock issues, various decisions as well as transactions are needed. By using index options, the complexities and costs of doing the action can be defrayed.
In comparison with other investments that may pose limitless risks, index options do not present any known risk to the investors. Typically, and index option investor is absolutely sure not to lose more than the price of the option which is the premium.
Also, index options can offer leverage. In essence, the investor can pay a comparatively small premium for market exposure with respect to the contract value. The investor can access huge percentage gains from moderately small, percentage moves in the underlying security that is favorable.
Where the index does not move as expected, the investor’s risk cannot be more than the premium paid.
Category: Index Options
