Saturday, 22 February 2014

How to use stock index options?

  1. Stock index options allow investors to take long and short positions on the market without having to buy or sell the stocks that make up the index.
  2. A stock index option is a put or call written on a market index.
  3. Options are offered on most of the major stock market indices.
  4. Settlement for stock index options is in cash rather than stocks.
  5. If you think the market is going to decline, you can buy a put option.
  6. With stock index options you can track the markets without having to buy or sell the stocks.
  7. Options on stock indices are valued and trade in the same way as options on individual stocks with the notable exceptions that settlement is made in cash for the former.
  8. The use of stock index options can assist individual investors with large stock portfolios to hedge against potential losses.
  9. If the investor does not want to sell holdings of appreciated stocks int he portfolio, the investor can protect these gains by buying stock index put options.
  10. If the market declines, the stock index puts will rise in value, which will  offset the losses on the individual stocks.
  11. Instead, if the investor wrote call options on the stock index resembling the portfolio, the value of the options would decline if the market declined. 
  12. The stocks in the portfolio would lose value, but this loss would be offset by the premiums received from writing the call options.


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