Index OptionsIndex options are one way of trading the major stock market indexes, only with greater leverage on your investment. The good thing about indexes is that they are generally much more stable than individual stocks, due to the fact that they are an 'average' of a basket of company stocks. Sometimes this basket is quite large, for example:Well Known Stock Indexes The S&P500 index is an average of the top 500 companies in the USA. The Russell 2000 measures the performance of 2000 'small cap' stocks in the United States. It is a subset of the Russell 3000. Other well known indexes include the Nasdaq 100 which averages the top 100 shares that trade on the Nasdaq exchange in the USA (the USA has a number of stock exchanges, including the New York and the American stock exchanges) And not to forget the Dow Jones Industrial Average - a barometer for the overall performance of the top 30 'large cap' stocks in the USA and the one you most hear about on the news. There are many other indexes, not only in the USA but in other countries such as Australia, whose major index is the "All Ordinaries". Or you will find the FTSE 100 in the UK, the Hang Seng in Hong Kong, the DAX in Germany and so on ... to name a few. You can also find indexes which represent market segments, such as telecommunications, resources, utilities and the banking sectors. But this is about index options and how you can use these to take advantage of price movements in the underlying. An individual company stock price might become unusually volatile after company news or earnings reports, but this is unlikely to affect the index the stock resides in, as a whole. So index options are not the sort of instrument you would tend to trade if you're relying on price breakouts or gapping. On the contrary, they are ideal for option strategies based on more steady, more smooth and reliable price action.
The Best Way to Trade Index Options You can of course, take options positions in the indexes themselves, but often the cost per option contract is so large that you need some decent capital to invest. But there is an alternative. There are a number of Exchange Traded Funds (ETF's) which hold a portfolio of stocks which mimic the combination of stocks that make up a particular index. For example, in the USA you have the SPY. This is an ETF whose stock holdings are linked to the Standard and Poors (S&P) 500 index. You also have the DIA (sometimes called 'the diamonds') and this ETF holds only the 30 stock that make up the Dow Jones index. So a movement in the Dow is closely reflected in a similar price movement in the DIA. You may have heard of the QQQQ. This is actually an exchange traded fund (ETF) which only hold the stocks that make up the Nasdaq 100 index. The QQQQ's are the most highly traded and liquid index options in the world. There are other index based ETFs available as well and this is common for stock exchanges in most countries. The beauty of these ETF's that they mimic price movements in the index, but the options are much cheaper to purchase than those from the index itself. This is why they are so popular and as a consequence, are more liquid and have huge open interest numbers. We have divided this section of Options Trading Mastery into categories as outlined in the table of contents below.
Index Option Trading - Contents1. QQQ Option Trading? 2. Spider Options Trading 3. OEX Option Trading 4. Index Options Calculator 5. Index Option Trading 6. Index Options Advisory Service 7. Stock Index Option Add a Comment
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