How to Use Stock Index Options

Stock index options allow investors take long and short positions in the market without having to buy or sell stocks from the index short.

A stock index option is a put or call written in the market index. Options are offered in most of the most important stock market indices, specially, in Standard and Poor?s (S&P) 500 Index, the Dow Jones Industrial Average, the Nasdaq 100 Index  and the Russell 2000 Index.

The arrangements for the stock index options are in cash instead than with stocks. For example, if a call option for an S&P 500 Index has a strike price of $1050, the holder has the option to buy the Index in cash for $105,000 (100 x 1050) at expiration date.

If S&P 500 Index increases above strike price plus the cost of the option, the holder will make some money. If you think the market will decline you can buy a put option.

With stock index option  you can research markets without  having to buy or sell stocks. The Dow Jones Industrial Average consists in 30 Blue chip stocks, the S&P 500 Index consists in 500 large-capitalization stocks, NASDAQ 100 tracks the 100 largest stocks in the NASDAQ, and the Russell 200 consist in 2000 small-capitalized stocks.

This wide basis of stock index options are actively negotiated mainly in the Chicago Board Options exchange. Options in stock indices are valued and negotiated in the same way as the options in individual stocks, except that the arrangements for the latter are made in cash.

The use of stock index options can help individual investors with large stock portfolios to hedge against potential losses. If the investor does not want to sell holdings of appreciated stocks in portfolio, he can protect his profits by buying stock index put options.

If the market declines stock index puts will increase their value, which will create losses on individual stocks. But, if the investor wrote call options in the stock index that reflect his portfolio, the value of the options would decline if markets fall. Stocks in a portfolio would lose their value , but this loss would be offset by Premiums received from writing the call options.

Beginner Money Investing Should you Invest in Stocks or Options? How to Use Stock Index Options