Chapter 29: Introduction to Index Option Products and Futures 497 
Thus, if stock A goes up by one point, then the value of the index would increase 
by 1.20 points since there are 1.2 shares of stock A in the index. One can see the value 
of computing such a statistic - it readily allows him to see how any individual stock's 
movement will affect the index movement during a trading day. This is especially use­
ful when a stock is halted, but the index itself keeps trading. 
Example: Suppose that, in the above index, stock Chas halted trading. There are 
0.68 shares of stock C in the index. Suppose that stock C is indicated 3 points lower, 
but that the index is currently trading unchanged from the previous night's close due 
to the fact that both stocks A and B are unchanged on the day. If one were to try to 
price the options on the index, he would be wrong to use the current price of the 
index since that will soon change when stock C opens. However, there is not really a 
problem since one can readily see that if stock C opens 3 points lower, then the index 
will drop by 2.04 points (3 x 0.68). Thus one should price the options as if the index 
were already trading about 2 points lower. This kind of anticipation depends, of 
course, on knowing the number of shares of stock C in the index. 
A similar type of analysis is useful when trying to predict longer-term effects of 
a stock on an index. If you thought stock C had a chance of rallying 30 points, then 
one can see that this would cause the index to rise over 20 points. Given this type of 
relationship, there are sometimes option spreads between the stock's options and the 
index's options that will be profitable based on such an assumption. 
It should also be noted that the number of shares of stock in a capitalization­
weighted index does not change on a daily basis since it does not depend on the price 
of the stocks in the index. However, the percent that each stock comprises of the index 
does change each day as prices change. Thus, the number of shares is a more stable 
statistic to keep track of, and is also more directly usable to anticipate index value 
changes as stock prices change. 
Capitalization-weighted indices are the most prevalent type, and most investors 
are familiar with several of them: the Standard and Poor's 500, the Standard and 
Poor's 400, the Standard and Poor's 100 (also called by its quote symbol, OEX), the 
New York Stock Exchange Index, and the American Stock Exchange Index. 
PRICE-WEIGHTED INDICES 
A price-weighted index contains an equal number of shares of each stock in the index. 
A price-weighted index is computed by adding together the prices of the various 
stocks in the index and then dividing that sum by the divisor to produce the index 
value. Again, the divisor is initially an arbitrary number that is used to produce a 
desired original index value-something like 100.00, for example. Let us use the same