- Index Option Trading
- Difference 2: Settlement Method
- Leverage & Predetermined Risk for the Buyer
- Contract Multiplier
- Continue Reading...
- Rights Conferred
- You May Also Like
- Continue Reading...
- Buying Straddles into Earnings
- Writing Puts to Purchase Stocks
- What are Binary Options and How to Trade Them?
- Investing in Growth Stocks using LEAPSÂ® options
- Effect of Dividends on Option Pricing
- Trade in the world's financial markets
- Bull Call Spread: An Alternative to the Covered Call
- Dividend Capture using Covered Calls
- Leverage using Calls, Not Margin Calls
- Day Trading using Options
- Index Options Vs ETF Options
- What is the Put Call Ratio and How to Use It
- Understanding Put-Call Parity
- Understanding the Greeks
- Valuing Common Stock using Discounted Cash Flow Analysis
Index Option Trading
Introduced in 1981, stock index options are options whose underlying is not a single stock but an index comprising many stocks.
Difference 2: Settlement Method
Investors and speculators trade index options to gain exposure to the entire market or specific segments of the market with a single trading decision and often thru one transaction. Obtaining the same level of diversification using individual stocks or individual stock options require numerous transactions and consequently slower decision making and higher costs.
Leverage & Predetermined Risk for the Buyer
Like equity options, trading index options gives the investor leverage and predetermined risk.
The index option buyer gains leverage as the premium paid relative to the contract value is small. Consequently, for a small percentage moves of the underlying index, the index option holder can see large percentage gains for his position.
Furthermore, risk is predetermined as the most the index option trader can lose is the premium paid to hold the options.
Stock index options typically have a contract multiplier of $100. The contract multiplier is used to compute the cash value of each index option contract.
Similar to equity options, index options premiums are quoted in dollars and cents. The price of a single equity index option contract can be determined by multiplying the quoted premium amount by the contract multiplier.
This is the amount that an index option buyer will need to pay to purchase the option and the amount that the index option writer will receive when selling the option.
As index options are cash-settled options, the holder of an index option does not possess the right to purchase or sell the underlying stocks of the index but rather, he or she is entitled to demand the equivalent cash value from the option writer upon exercising his option.
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Buying Straddles into Earnings
Buying straddles is a great way to play earnings.
Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]
Writing Puts to Purchase Stocks
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]
What are Binary Options and How to Trade Them?
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time.....[Read on...]
Investing in Growth Stocks using LEAPSÂ® options
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®....
Effect of Dividends on Option Pricing
Cash dividends issued by stocks have big impact on their option prices.
Trade in the world's financial markets
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]
Bull Call Spread: An Alternative to the Covered Call
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement.
In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]
Dividend Capture using Covered Calls
Some stocks pay generous dividends every quarter.
You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]
Leverage using Calls, Not Margin Calls
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk.
A most common way to do that is to buy stocks on margin....[Read on...]
Day Trading using Options
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading....
Index Options Vs ETF Options
What is the Put Call Ratio and How to Use It
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]
Understanding Put-Call Parity
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969.
It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]
Understanding the Greeks
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks"....
Valuing Common Stock using Discounted Cash Flow Analysis
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow....