- 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.
- A stock index option is a put or call written on a market index.
- Options are offered on most of the major stock market indices.
- Settlement for stock index options is in cash rather than stocks.
- If you think the market is going to decline, you can buy a put option.
- With stock index options you can track the markets without having to buy or sell the stocks.
- 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.
- The use of stock index options can assist individual investors with large stock portfolios to hedge against potential losses.
- 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.
- If the market declines, the stock index puts will rise in value, which will offset the losses on the individual stocks.
- 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.
- 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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