Introduction to Index Option 
Products and Futures 
Since their introduction in 1981, listed index options have proved to be very popular. 
Index options are options whose underlying security is not a single stock but rather an 
index composed of many stocks. These include options on index futures contracts. 
Most popular types of cash settlement options are options on indices or subindices. The 
strategies employed in trading these options are not substantially different from those 
used in trading stock options, with a few notable exceptions. However, the options 
themselves tend to be priced differently and to trade differently. It is these differences 
between stock options and index options on which we will predominantly concentrate. 
Index products - cash-based options, futures-based options, and index futures -
will be the main topic of discussion in this section of the book. We will look at how 
indices are constructed, how to use these products to speculate, how to hedge, and 
how to spread one index against another. Both futures and options will be used in 
these strategies. The discussion of other futures options - currencies, grains, bonds, 
etc - will be deferred to a later chapter. 
In this chapter, we will be looking at introductory facts about index options and 
futures which differentiate them from the equity options that have encompassed the 
entire previous part of this book. First, however, we will take an in-depth look at stock 
indices and the methods of calculating them. Also in this chapter there will be a dis­
cussion of futures contracts and how trading them differs from trading stocks and 
stock options. 
INDICES 
Since many cash-based or futures options have an index of stocks underlying the 
option, it is useful to understand how indices are calculated, in order that one may 
be able to understand how an individual stock's movement within the index affects 
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