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