Index Options ? Stocks in a nutshell

Index Options – Stocks in a nutshell

Index options are options whose underlying asset is not a single stock but an index comprising of many stocks, representing a portfolio of stocks or commodities which are grouped in a particular way. The benefits to the investor when trading on these options are that they are gaining exposure to large sections of the market with a single trade and often through a single transaction.

Therefore, trading in binary index options is preferred by many as the investor is able to obtain the same level of diversification without dealing with individual stocks and getting into individual issues which could amount to many more transactions and therefore is more costly.

Now that we’re past the technical stuff, let’s talk practical. Look at the S&P 500 Index for example, just one of anyoption’s 23 index options available to trade on and the most widely followed index of large-cap American stocks. This index includes 500 leading US companies in major industries of the US economy, alone capturing, 75% coverage of all US equities. The S&P 500 index is made of big names such as Apple Inc (Information Technology), Johnson & Johnson (Healthcare) and JP Morgan Chase and Co (Financial).

Trading binary future options on this index gives the investor exposure to the market efficiently and cheaply, rather than the expense of betting on single components separately. This can be useful for investors who have an idea about where the markets are headed but who don’t want to worry about individual stocks or commodities. After all, it is rare that an individual would own and be able to profitably monitor all 500 stocks in the S&P 500!

Trading in index options also allows investors to trade in particular sections of the market on a larger scale. For example, at anyoption we offer the following indices that specialise in specific segments of the market:

DAX (Deutscher Aktien Index) – representing 30 of the largest and most liquid German companies operating on the Frankfurt exchange.
FTSE 100 (Financial Times Stock Exchange), otherwise known as the footsie – representing 100 of the largest British companies that trade on the London Stock Exchange.
CAC (Continuous Assisted Quoatation) – The French Stock Market that tracks the 40 largest French stocks that trade on the Paris Stock Exchange.

The ease and simplicitiy of monitoring and understanding price changes in the stock indices can be of an advantage when trading in index options. Because they consist of well-known, frequently referenced companies in the media, the burden of keeping informed on the movement of indices is kept to a minimum. The indices are price-weighted so this means that a price change in any of the stocks will have an equal effect on the index.

It could take as little as a lunch-time financial news report that puts you in a good position to make a backed decision on the movement of an index option. In this example let’s say that you are informed that the FTSE 100 is up 4,914.220 and is continuing to rise. With the easy online accessibility of anyoption, within minutes of hearing this news you could be placing a Call option of say 0 on a 1 hour expiry time with a 70% return. If the financial news report is anything to go by and the option expires in-the-money, even by 0.001, you would be receiving a healthy return of 0 (0 of the 70% and 0 of your original premium). That’s the icing on the cake to a satisfying lunch stop.

So the simplicity of index options seems to be a winning tool to its growth and open interest, which gives us a clear indication of its growing liquidity. The exposure it gives us to the market  in exchange for a marginally small premium makes these compact, no-fuss options a great route to investing for those of us who would frankly rather not get into too much detail.

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Tags: stocks, nutshell, Index, Options

Tagged with: Index • nutshell • Options • stocks

Filed under: Stock Software General

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