6. Index Options. These allow a trader to use call or put options to wager on the movement of an entire stock market index, such as the Dow Jones U.S. Market Index or the S&P 500 Index, rather than just an individual security. By trading index options, a trader is able to capitalize on their prediction of the direction or volatility of a whole equity market rather than needing to trade options on each individual security. The biggest challenge most traders face in pricing index options is calculating the estimated dividend.
- In general, index options tend to be less subject to volatility than the individual stocks comprising the index.
- An index is liable to even out the fluctuations that may be experienced by individual stocks within it, and as a result, index options also tend to be more stable than other types of options.
- Most index options have European-style exercise. This means they can’t be exercised until expiration. But the trader isn’t completely stuck. As with any other option, index options can be bought or sold at any time throughout the life of the contract.
- The volumes are large, as index options are widely traded by hedge funds and investment firms as well as individual traders.
- However, for day traders this volume also reduces the spreads quoted in the market.
7. Mini Index Options. Mini index options are just like regular index options but with only 10 percent of the contract size (and 10 percent of the cost). The lower cost allows options traders with limited capital to take advantage of trading on the wider market. This also allows the day trader more strategy scope.
Some advantages of trading mini index options are the following:
- They are cheaper than regular index options.
- They are a perfect replica of their underlying index.
- They offer a partial hedge against index options.
Disadvantages of trading mini index options include the following:
- They tends to have a wide bid/ask spread.
- They often have a high extrinsic value as a result of lower liquidity.
- They are often substantially more expensive than ETF options.
Binary Options
-
InvestingETF Options Versus Index Options
Choosing either ETF options or index options can make the difference between big profits or a big bust. -
TradingMini Options: A Useful Tool For Trading High-Priced Securities
Mini options are option contracts wherein the underlying security is 10 shares of a stock or exchange-traded fund (ETF). This is the main difference between mini options and standard options, ... -
TradingTrading Options on Futures Contracts
Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ... -
TradingOptions Pricing
Options are valued in a variety of different ways. Learn about how options are priced with this tutorial. -
Personal FinanceTop 5 Books on Becoming an Options Trader
For individuals aspiring to become options traders, here are five of the best books that offer help in understanding and profiting from the options markets. -
TradingGoogle Stock Too Expensive for You? Try Options
Learn how to invest in Google (now Alphabet, Inc.) and other high-value stocks with less capital by using options. -
TradingBeginners Guide To Options Strategies
Find out four simple ways to profit from call and put options strategies. -
InvestingTake Advantage of Employee Stock Options
If your employer offers stock options, they can contribute to your long-term financial success. Here's how.