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 does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  6. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
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