stock index options

Thus, the OCC allows each investor to act independently of the other. For instance, for an option that has a quote of $1, an investor would have to pay $100 for each option contract, plus sales commissions. The expiration dates of long-term options are based on specific sequences. For instance, the S & P 500 Index Option contracts differ because they expire Thursday night before the 3rd Friday, and the settlement value of the contract depends on the opening stock prices of the S & P 500 on the Friday following expiration. On October 6, 2006, you bought 10 call contracts for Microsoft, with strike price of $30, expiring in January, 2007, at $0.35 per share, paying a typical commission of $9.95 per trade plus $0.75 per contract. Sarah Call-Buyer buys a contract that has the same terms that John Call-Writer wrote — in other words, it belongs to the same option series. The 2 near-term options are the nearest 2 months. In February, the price of XYZ rises to $35, and Sarah thinks it might go higher in the long run, but since she doesn't think the stock will go much higher before the expiration of the call, she decides to exercise her call to buy XYZ at $30 per share to be able to hold the stock indefinitely. However, OTC options have greater transaction costs and less liquidity. There are 3 styles of options that differ as to when the option can be exercised. a call with a strike price of $30 has no intrinsic value, but a put would have an intrinsic value of $2 per share.

Prices are usually quoted as a minimum + an amount per contract, but phone orders cost more, and broker-assisted trades are the most expensive.

The effective date is the ex-date established by the primary market in the underlying security. As the remaining time for the option declines, so does its time value, until at expiration it becomes completely worthless, and ceases to exist. The futures or options contract's value is based on the movements of the index it tracks. Thus, 1 call contract to buy 100 shares of MSFT would cost $8.00. For example, when the CAC 40 stock index moves down, the CAC 40 futures market typically sinks by roughly the same amount. The customer is selected by a specific procedure, usually on a first-in, first-out basis. Examples of closely watched indexes around the world include the S&P 500, Dow Jones Industrial Average, FTSE 100, Nikkei 225, CAC 40, and DAX. Using the equation above to verify: 100 × 50 = 200 × 25. That said, the futures contracts can also be charted and analyzed.
The cash that is paid upon exercise depends on the index, which depends on the component prices of the index. An index is simply a collection of stocks (or other assets) that moves according to the stocks held within it. About - Sitemap - Terms of Use - Privacy Policy - Contact, What is Private Equity? When an investor buys an option contract, that contract is based on what is known about the contract terms at the time; however, events can occur that would change the basic relationship between the option contract and the right that it confers. The CBOE was the original exchange for options, but, by 2003, it has been superseded in size by the electronic International Securities Exchange (ISE), based in New York.

Thus, all Microsoft calls compose an option class, while all Microsoft puts compose another.

To prevent these scenarios, adjustments are made to the option contracts (sometimes called adjusted options), when the relationship to the underlying security is significantly altered. The OCC is the direct participant in every purchase and sale of an option contract. (However, different countries may have different standards.

– Research Report. Microsoft drops to $25 per share by expiration day in January, 2007, so you exercise your put, allowing you to buy 1,000 shares of Microsoft in the open market for $25 per share, and selling it for $30 per share to a put writer. During the October 2006 to April 2007 period, MSFT was briefly above $30, with a high slightly above $31. The strike price is based on an index value multiplied by the multiplier of the contract, which is usually $100 (USD). The greater the time until expiration, the greater the chance that the option can become profitable, and thus, the greater the time value. Charting the stock indexes, instead, allows a trader to analyze multiple options contracts using a single chart. Instead, they exist for informational purposes only—as a way to track the performance of a group of stocks. Thereafter, it trades in the secondary market. So even if the option was closed out at the market top, profits would have been minimal after subtracting the call premium and transaction costs. Because the OCC is always a party to an option transaction, an option writer can close out his position by buying the same contract back, even while the contract buyer retains her position, because the OCC draws from a commingled pool of contracts that lack any connection to the original contract writer and buyer. Note that, although European-style options can only be exercised during a brief time right before expiration, the options can be sold before then. Your email address will not be published.

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