This section takes a look into index options including education articles and technical analysis.
Index Options are options, which give the buyer the right but not the obligation to purchase an option derived on an index, such as the DAX or Nikkei 225, as opposed to being a hard asset or a stock. It is simply a number that represents the performance of a group of stocks. They appeal to investors because they are a good diversification investment as indices suffer less from individual risk, like a company doing badly when single company stocks are purchased, or secondary risk, where an industry is not doing so well.
This particular strategy is one that is attractive to investors trading on the belief that a particular world index, like the UK’s FTSE, will make a major shift in one direction, but is unsure in which direction the move will go – either up or down. It would also appeal to investors seeking to benefit from the leverage that index options have the potential to offer.
Index options trading were introduced into the financial market in 1981. Similar to equity options which are based on an underlying stock, index options are based on an underlying financial index.The main advantage of trading in index options is that it allows an investor to be diversified to the overall market or a sector of the financial market with just a single investment decision and one transaction.
Without index options trading, an investor will have to make several transactions to have the same level of diversification to the financial market.
Index Options enable investors looking to expose themselves to the whole financial market or to segments of the market with a single investment. The investor can agree a contract with a seller such as a brokerage firm, to buy an underlying asset at a set date in the future at a set time. The buyer, however can exercise their option not to go through with the contract and they can let it expire. They pay a premium to the seller to get this right. If they decide to follow through and buy the asset the seller is obliged to sell.
Stock indexes such as the NASDAQ, the FTSE 100 the top 100 companies listed on the Financial Times Stock Exchange, the FTSE 500 which is the top 500 companoes listed or the French exchange; the CAC.