Index options
Also known as: equity index options, stock index options
Index options are option contracts based on the value of a stock market index, such as the S&P 500, rather than an individual stock. They settle in cash instead of shares, since an index itself cannot be delivered.
Index options give the holder the right to profit from movements in a stock market index — like the S&P 500 (SPX), the S&P 100 (OEX), or the Nasdaq-100 — without owning the underlying stocks. Calls profit when the index rises above the strike price; puts profit when it falls below.
Because you cannot deliver an index, these contracts are cash settled. At exercise, the writer pays the holder the in-the-money amount times the contract multiplier, which is typically 100. For example, if an investor exercises a 4,500 call when the index closes at 4,530, the writer delivers 30 points × 100 = $3,000 in cash. Settlement of the exercise occurs on the next business day, and the settlement value is based on the index level at exercise, not when the holder purchased the contract.
Investors and portfolio managers use index options to speculate on the overall market or to hedge diversified portfolios. Buying broad-based index puts is a classic strategy for protecting a large stock portfolio against a market decline without selling the underlying positions.
Index options appear regularly on securities licensing exams, including the SIE, Series 7, and Series 65. Know that they are cash settled, that most broad-based index options (like SPX) are European-style while OEX options are American-style, and be ready to calculate gains, losses, and settlement amounts using the 100 multiplier.
Key takeaways
- Index options are calls and puts on a stock market index rather than an individual stock.
- They settle in cash: the writer pays the holder the in-the-money amount times the multiplier (typically 100).
- Portfolio managers buy index puts to hedge diversified stock portfolios against market declines.
- The SIE, Series 7, and Series 65 exams test cash settlement mechanics and gain/loss calculations on index options.