Equity Index Options

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Open an account with Merrill. Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled " Characteristics and Risks of Standardized Options PDF " before considering any option transaction. You may also call the Investment Center at A separate client agreement is needed.

Multi-leg option orders are charged one base commission per order, plus a per-contract charge. An equity index option is a security which is intangible and whose underlying instrument is composed of equities: an equity index. The market value of an index put and call tends to rise and fall in relation to the underlying index. Generally, the factors that affect the price of an index option are the same as those that affect the price of an equity option:.

The underlying instrument of an equity option is a number of shares of a specific stock, usually shares. Cash-settled index options do not correspond to a particular number of shares. Indexes, by nature, are less volatile than their individual component stocks. The up and down movements of component stock prices tend to cancel one another out. This lessens the volatility of the index as a whole. However, factors more general than those affecting individual equities can influence the volatility of an index.

These can range from investors' expectations of changes in inflation, unemployment, interest rates or other fundamental data. As with an equity option, an index option buyer's risk is limited to the amount of the premium paid for the option. The premium received and kept by the index option writer seller is the maximum profit a writer can realize from the sale of the option. However, the loss potential from writing an uncovered index option is generally unlimited. Any investor considering writing index options should recognize that there are significant risks involved.

The differences between equity and index options occur primarily in the underlying instrument and the method of settlement. Generally, cash changes hands when an option holder exercises an index option and when an index option writer is assigned. Only a representative amount of cash changes hands from the investor who is assigned on a written contract to the investor who exercises his purchased contract.

This is known as cash settlement.

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Purchasing an index option does not give the investor the right to purchase or sell all of the stocks contained in the underlying index. Because an index is simply an intangible, representative number, you might view the purchase of an index option as buying a value that changes over time as market sentiment and prices fluctuate. An investor purchasing an index option obtains certain rights per the terms of the contract.

In general, this includes the right to demand and receive a specified amount of cash from the writer of a contract with the same terms. An option class is a term used for option contracts of the same type call or put and style American or European that cover the same underlying index.

Available strike prices, expiration months and the last trading day can vary with each index option class. The strike price, or exercise price, of a cash-settled option is the basis for determining the amount of cash, if any, that the option holder is entitled to receive upon exercise. Premiums for index options are quoted like those for equity options, in dollars and decimal amounts.

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The writer, on the other hand, receives and keeps this amount. The amount by which an index option is in-the-money is called its intrinsic value. Any amount of premium in excess of intrinsic value is called an option's time value. As with equity options, changes in volatility, time until expiration, interest rates and dividend amounts paid by the component securities of the underlying index affect time value.

The exercise settlement value is an index value used to calculate how much money will change hands the exercise settlement amount when a given index option is exercised, either before or at expiration.

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The reporting authority designated by the market where the option is traded determines the value of every index underlying an option, including the exercise settlement value. Unless Options Clearing Corporation OCC directs otherwise, this value is presumed accurate and deemed final for calculating the exercise settlement amount. Reporting authorities determine the exercise settlement values of equity index options in a variety of ways. The two most common are:. If a particular component security does not open for trading on the day the exercise settlement value is determined, the last reported price of that security is used.

When the exercise settlement value of an index option is derived from the opening prices of the component securities, investors should be aware that value might not be reported for several hours following the opening of trading in those securities. A number of updated index levels may be reported at and after the opening before the exercise settlement value is reported. I papre traded for 4 months successfully as well before ever putting on a single position and only worked that position the first month for profits of on a account.

And one last thing, did you only do condors? Remember the greeks training? Anywho, I love this system, I average more than 20 percent a month thus far on the monthly investments I make.

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I have never traded a single day of my life. We use cookies on this site to enhance your user experience. By clicking any link on this page you are giving your consent for us to set cookies. Trading Options For Income. Overall Rating Rate this item: 1. Please wait Investment Performance Rating from 6 votes. Rate this item: 1. Show Votes. Value For Price Rating from 5 votes. Customer Service Rating from 5 votes. Subscribe to this comment thread Please do not use personal information like your email address in the text of your comments. Add a Topic. Inline Feedbacks. Carl F.

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