Index Option

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DEFINITION of 'Index Option'

A financial derivative that gives the holder the right, but not the obligation, to buy or sell a basket of stocks, such as the S&P 500, at an agreed-upon price and before a certain date. An index option is similar to other options contracts, the difference being the underlying instruments are indexes. Options contracts, including index options, allow investors to profit from an expected market move or to reduce the risk of holding the underlying instrument.

INVESTOPEDIA EXPLAINS 'Index Option'

Index options provide diversification as investors are exposed to a large number of securities in one trading instrument. The degree of exposure varies with the particular index option. Popular index options include S&P 500 Index Options (SPX), Dow Jones Industrial Average Index Options (DJX) and Nasdaq-100 Index Options (NDX). Index options are typically cash settled.

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RELATED FAQS
  1. Can I buy index options on the Dow Jones Industrial Average?

    The Chicago Board Options Exchange, or CBOE, offers index options on the Dow Jones Industrial Average that are European-style ... Read Full Answer >>
  2. What are the most effective hedging strategies to reduce market risk?

    There are a number of effective hedging strategies to reduce market risk, depending on the asset or portfolio of assets being ... Read Full Answer >>
  3. What is index option trading and how does it work?

    Index options are financial derivatives based on stock indices such as the S&P 500 or the Dow Jones Industrial Average. ... Read Full Answer >>
  4. How do you tell whether an option is American or European style?

    As a quick recap, American-style options are options that can be exercised at the strike price anytime before or on the date ... Read Full Answer >>
  5. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
  6. What happens if a software glitch fails to execute the strike price I set?

    If you've ever suffered the frustrating experience of having an order not filled or had a strike price fail to execute because ... Read Full Answer >>
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