DJIA   NASDAQ 15 mins delayed
Open Account with stock trading company

Get Started with your options
Index Options

Benefits of Listed Index Options

Like equity options, index options offer the investor an opportunity to either capitalize on an expected market move or to protect holdings in the underlying instruments. The difference is that the underlying instruments are indexes. These indexes can reflect the characteristics of either the broad equity market as a whole or specific industry sectors within the marketplace.

Diversification

Index options enable investors to gain exposure to the market as a whole or to specific segments of the market with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stock issues or individual equity option classes, numerous decisions and transactions would be required. Employing index options can defray both the costs and complexities of doing so.

Predetermined Risk for Buyer

Unlike other investments where the risks may have no limit, index options offer a known risk to buyers. An index option buyer absolutely cannot lose more than the price of the option, the premium.

Leverage

Index options can provide leverage. This means an index option buyer can pay a relatively small premium for market exposure in relation to the contract value. An investor can see large percentage gains from relatively small, favorable percentage moves in the underlying index. If the index does not move as anticipated, the buyer's risk is limited to the premium paid. However, because of this leverage, a small adverse move in the market can result in a substantial or complete loss of the buyer's premium. Writers of index options can bear substantially greater, if not unlimited, risk.

Guaranteed Contract Performance

An option holder is able to look to the system created by OCC's Rules and By-Laws (which includes the brokers and Clearing Members involved in a particular option transaction) and to certain funds held by OCC rather than to any particular option writer for performance. Prior to the existence of option exchanges and OCC, an option holder who wanted to exercise an option depended on the ethical and financial integrity of the writer or his brokerage firm for performance. Furthermore, there was no convenient means of closing out one's position prior to the expiration of the contract.

As the common clearing entity for all U.S. exchange-traded securities option transactions, OCC resolves these difficulties. Once OCC is satisfied that there are matching orders from a buyer and a seller, it severs the link between the parties. In effect, OCC becomes the buyer to the seller and the seller to the buyer. As a result, the seller can buy back the same option he has written, closing out the initial transaction and terminating his obligation to deliver cash equal to the exercise amount of the option to OCC. This will in no way affect the right of the original buyer to sell, hold or exercise his option. All premium and settlement payments are made to and paid by OCC.





Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options

Content Licensed by the Options Industry Council. All Rights Reserved. OIC or its affiliates shall not be responsible for content contained on the SogoTrade Inc. Website not provided by OIC. Content licensed by the Options Industry Council is intended to educate investors about U.S. exchange-listed options issued by The Options Clearing Corporation, and shall not be construed as furnishing investment advice or being a recommendation, solicitation or offer to buy or sell any option or any other security. Options involve risk and are not suitable for all investors. No information provided by The Options Industry Council Website has been endorsed or approved by SogoTrade Inc. and SogoTrade Inc. is not responsible for the contents provided by The Options Industry Council. For more information, please click here. 

The articles in this section are provided by The Options Industry Council and is intended for educational purposes only and does not in any way constitute recommendations or advice from SogoTrade,Inc. Accordingly, SogoTrade, Inc. is not responsible for the accuracy, completeness, or correctness of the information provided in these articles.

Please note fees, commissions and interest charges should be considered when calculating results of options strategies.  Transaction costs may be significant in multi-leg option strategies, including spreads, as they involve multiple commission charges.

SogoTrade, Inc does not provide tax advice.  Please consult with a tax advisor as to how taxes may affect the outcome of options transactions/strategies.