Chapter 29: lntrodudion to Index Option Produds and Futures S01 
introduced by the CBOE), the NASDAQ Index ($NDX), the Dow-Jones 30 
Industrials ($DIX), and several other indices. In each of these cases there are too 
many stocks in the index, and too many varying quantities of each of the stocks, to be 
able to handle the physical delivery of each of the stocks in the case of exercise or 
assignment. Some cash-based options are based on subindices ( that is, subgroups of 
the larger indices such as the transportation group). 
EXERCISE AND ASSIGNMENT 
It is important to understand the ramifications of exercise and assignment when deal­
ing with this type of option. When a cash-based option is exercised, the owner 
receives cash equal to the difference between the index's closing price and the strike 
price of the option. The option writer who is assigned must pay out an equal amount. 
The following example shows how a call exercise might work. In this and the follow­
ing examples we will use a fictional index '.lYX (index symbols often end in X). 
Example: Suppose an investor buys a '.lYX September 160 call option. At a later date, 
the index has risen substantially in price and closes at 175.24 on a particular day. The 
investor decides it is time to take his profit by exercising his call option. Assuming the 
'.lYX contract is worth $100 per point, just as stock options are, he receives cash in 
the amount of $100 times the difference between the index closing price and the 
strike price: $100 x (175.24 - 160.00) = $1,524. He has no further position or rights 
- the option position disappears from his account by virtue of the exercise and he 
does not acquire any security by the exercise; he gets only cash. 
An assignment would work in a similar manner, with the seller of an option hav­
ing to pay out of his account cash equal to the difference between the index closing 
price and the option's striking price. As an example, suppose that a trader sells a put 
option on the '.lYX Index - the October 165 put. Subsequently, the index drops in 
price, and one morning the writer of this put option finds that he has been assigned 
(as of the previous day, as is the case with stock options). If the index closed at 157.58 
on the previous day, then the option writer's account will be debited an amount equal 
to $100 X (165.00 - 157.58) = $742. 
EUROPEAN VERSUS AMERICAN EXERCISE 
Before proceeding with more examples of index option exercise and the accompany­
ing strategies, it is necessary to introduce two new definitions. American exercise 
means that an option may he exercised at any time; European exercise means that an 
option may only be exercised on its expiration day. Many of the cash-based index