Index and Securities options are both similar and are both popular with investors. Index options are based on an index. Index options are helpful as they allow traders to bet on a direction of the entire market without needing to trade individual options.
Most index options are European style options. This means that you will only be able to exercise the right of the option at the expiry date. The only exception to this is the CBX which operates as an American style option.
When trading OEX options it is possible to exercise the option at any time before the option expires. The amount settled will depend upon the closing price on the day that you decide to exercise.
Settling Index Options
As most of these index options are European, physical delivery is impossible. This means that settlement is almost always in cash, this settlement will take place on the day after the expiration date.
The method used to work out the settlement price will vary depending on the index you choose. You will need to check the specifications on the contract to find out how this will be calculated.
If investing in a KOSPI index option then the settlement value will be calculated using the weighted average of all the stocks which make up the index during the last 30 minutes of the day.
The NIKKEI 225 index options use a different method, they calculate based on the weighted average the day after the day of final trading.
The settlement price will be calculated by the exchange. This is known as the SQ or Settlement Quote in the business.
Why Invest in Index Options
1. To Diversify
Options which are based on indexes rather than stocks offer much more diversification. This means that you can spread the investment over several different assets to reduce risk. The investment is spread over many different stocks which make up the index, this should help to reduce your overall risk of investment.
Stock indexes are made up of lots of different stocks. The number and types of stocks which make up the index will differ depending on the index. For example the S&P index is made up of 500 of the largest publically traded businesses in America. The FTSE 100 is made up of 100 of the largest public limited companies in the UK.
2. More Predictable
Investors should also find that index options are normally much less volatile than investing in individual stocks. This is because individual shares are affected by announcements about the company’s performance, including rumors and reports. The index is much less susceptible to this.
3. More Liquid
Index options are also much more liquid and can be converted into cash much easier. This makes them popular with certain investors and managers of hedge funds. Because these are popular it is much easier to sell them for a fairer price, it also means that there will be plenty of volume of options to trade.
Trading index options can be a great way to invest in the stock market while reducing your risk. You will need to look for a suitable broker which allows you to buy and sell these options. Don’t just look around and compare brokers based on price though. Make sure that you choose a good reliable broker which offers all the services you need.
If you haven’t already chosen a broker then you should consider looking at optionsXpress. This is because they offer a wide range of different services and also have excellent support and advice. It can be difficult to trade options at first, which is why you need all the help you can get.
You can register on optionsXpress for a virtual account which will make it possible to try out trading with pretend money, before investing your hard earned cash.