Options cousin has a twist: you can't buy the index

These newfangled index options are quite similar to individual stock options, which have been around for years. When you trade individual stock options, you can buy or sell a ``call'' or a ``put.'' When you buy a call, on IBM for example, you buy the right, but not the obligation, to purchase IBM stock at a future date, at a future price. With a put, you buy the right to sell your stock at a future date and price.

So you might pay $400 for a call option to buy 100 shares of IBM stock for $140 a share in April. When you buy the call, IBM is selling at $135; thus, you're betting $400 (plus commission fees) that it will go far enough above $140 (the ``strike price'') between now and April that you will make a profit. Typically, the money won (or lost) on the option is made by selling it before the expiration date in April. If you haven't sold the option by the expiration date, or exercised it by actually buying the IBM stock, it becomes worthless.

This brings up one significant difference between the stock index call option and an individual stock option. At no point do you really have the option to buy the stocks comprising the index. Instead, you either trade the option to someone else before expiration or settle up in cash for the difference between your option purchase price and the expiration date price.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK