 |
 |
Index Option Trading Section |
Index Option Trading Section
Before we start speaking about index option trading
let us
define what an index actually is. According to economic encyclopedias,
an index is a statistical gauge of changes in economy or securities
markets. It lists different stocks that have something in common and
represents their overall value. In other words, this is a notional
securities portfolio reflecting a market on the whole or its portion.
Some indices are broad, others are concerned with a specific group. An
index can enumerate companies specializing in the same field or having
similar styles of management. Some foreign indices reflect the total
value of foreign stocks. Technically, you invest not in the index
itself but in an index fund or another security tracking it.
Indices are usually expressed basing on shifts from their basic value.
They help evaluate economy progress and the general situation on the
stock market.
In the United States, three major indices can be distinguished. They
are: the Nasdaq Composite, Dow Jones Industrial Average (“the
Dow” or “the DJIA”) and the Standard
& Poor's 500
(S&P 500). Altogether, these indices are called 'Security
Market
Indicator Series'.
Indices are classified according to the way they are weighted. For
example, the DJIA is a price-weighted index, that is, each stock
influences the whole index basing on its price per share. Stocks that
cost more will have more weight and impact on the market, too.
The S&P 500 is a market-value weighted index. It means that the
weight of each stock is proportional to its value in the market.
Index option trading is considered less risky than stock option trading
as it is unlikely that the value of a specific company in the index
will abruptly fall. They facilitate performance trend analysis and form
a part of most Mutual Fund portfolios. Investors occupied with index
option trading bet on the movement of the stock market as a whole.
You can also find some information on individual stocks option trading
and basic terminology used in option trading in our articles on Stock Option Trading
and Basic
Option Trading Concepts.
|
|
|
|
|
|
|
|