Investors who want to take a position in index options will purchase calls and puts just like investors in stock options. However, an index is not a security and cannot be physically delivered if the option is exercised. An investor cannot call the index away from someone who is short a call and cannot put an index to an investor who is short a put. As a result, the exercise of index options will be settled in cash. An option holder who elects to exercise the option will have their account credited the in the money amount, in cash. The amount that will be credited to their account will be the in the money amount at the close of the market on the day of exercise. The exercise of an index option settles between broker dealers on T + 1 and customer accounts will be credited or debited accordingly. To determine the option’s premium and the amount of money to be delivered upon exercise index options, use 100 as a multiplier.

Example:

An investor establishes the following position:

Long 1 OEX March 550 call at $4

The investor has purchased an S & P 100 (OEX) 550 call for $4. The contract value is 55,000 and the total premium paid by the investor is $400. The investor is bullish on the overall market and believes the market will rise and the OEX will be higher than 550 by expiration.

If at expiration, the index is at 556.20, the investor will have their account credited the in the money amount as follows:

556.20 - 550.00 = 6.20

6.20 x 100 = $620.00 

The investor’s account will be credited $620. Since the investor paid $400 for the option their profit is $220.

Need Help Passing Your Series 4 Exam?

Exercising An Index Option

Related Articles
  1. Trading

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  2. Trading

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  3. Trading

    Exploring European Options

    The ability to exercise only on the expiration date is what sets these options apart.
  4. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  5. Trading

    Going Long On Calls

    Learn how to buy calls and then sell or exercise them to earn a profit.
  6. Investing

    ETF Options Vs Index Options

    Investors have much to consider when they’re deciding between ETF and index options. Here's help in making the decision.
  7. Investing

    ETF Options Vs. Index Options

    Choosing either ETF options or index options can make the difference between big profits or a big bust.
  8. Trading

    Index Options: A How-To Guide

    Index options, financial derivatives that derive their value from a stock index, can provide stability and peace of mind for less risky investors.
Frequently Asked Questions
  1. Do interest rates increase during a recession?

    Learn why interest rates do not rise in a recession; in fact, the opposite happens. Identify the factors that reduce interest ...
  2. What is the difference between deflation and disinflation?

    Learn what deflation and disinflation are, how supply and demand affect price levels, and the difference between deflation ...
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ...
  4. What does CHIPS UID mean?

    Learn what CHIPS UID stands for and how it facilitates the transfer of funds as the back-end of the ACH network for both ...
Trading Center