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. 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 >>
  2. 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 >>
  3. If a long call is owned on the record date of a stock, is the owner of the option ...

    The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the ex-dividend date, ... Read Full Answer >>
  4. How can an investor profit from the cyclical nature of the electronics sector?

    An investor can profit from the cyclical nature of the electronics sector in two ways. He can employ sector rotation, shifting ... Read Full Answer >>
  5. What does negative vega mean for credit spreads?

    Greek vega measures an option's sensitivity with respect to a change in the underlying asset's volatility. The vega of an ... Read Full Answer >>
  6. What options strategies are best suited for investing in the banking sector?

    The covered call option strategy allows investors to profit from the banking sector's stability and its track record for ... Read Full Answer >>
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