Index Option Trading Strategies [Guide for Beginners]

Index Trading

The practice of trading stocks which make up the index is known as Index Trading. Index trading is a preferred way amongst many investors because when you trade an index you can actually analyze that whether the index will fall or rise. You don’t actually need to trade in the underlying assets of the index. Trading in indices is very similar to trading in commodities or stocks.

The basic agenda behind trading an index is simple, buying an index at a lower price and selling it at a higher price to extract some profits.

The rise and fall in the prices of an index depends on the collective performance of the stocks included in it.

Index Options

Index Options are very similar to the conventional stock market options. Options in the context of stock market are a derivative instrument whose value is derived from an underlying asset.

In case of index options, the underlying asset is one of the market indices. Options provide the investor with an opportunity to speculate market movements. Index Options provides an opportunity to traders and investors to speculate the movements of the whole stock market at once in a single asset class.

Since index includes variety of stocks and index options have an index as an underlying asset, they provide a decent opportunity to the investors for diversification.

Index Option Strategies

• Call Option - These are contracts that give the buyer the right to purchase a stock, bond, or commodity at a specific price within a specified time frame. The underlying asset can be a stock, a bond, or a commodity. When the price of the underlying asset rises, a call buyer profits. This fixed price is referred to as the strike price.
  

  Before the expiration date, the buyer must exercise his or her option, after which the seller has no choice but to sell the asset at the strike price.

  A trader will profit if he or she buys an option at a price lower than the underlying stock value and then sells the stock. If someone buys a call option with a strike price of Rs 10 before the expiration date, he or she can exercise the option to buy the stock for Rs 10 before the expiration date.



• Put Option - A put option gives the buyer the right to sell the underlying asset at a specific price at any time up until the expiration date. It signifies that the dealer has bought the right to sell it. If a trader buys the option to sell and also buys the stock when the stock price is below the underlying stock value, the trader will benefit because the purchase price is lower than the sale price.
  

  In, at, and out of the money are terms used to describe put options. When the underlying stock price is below the put strike price, it is said to be in the money. It is called out of the money when the underlying price is higher than the strike price. When the underlying and strike prices are equal, the option is said to be at the money.