Index options include baskets of stocks that are combined from group or sector indices. The most well known is the SPX. It is the cash value of all of the stocks in the S&P (Standards and Poor) 500. Each stock has its own weighting within the index. There are also sector indices like the XLF. Its components are all financial stocks. An index option moves with the underlying index. Most index options are European style. That means that they can’t be exercised before expiration. However, you can trade in and out of the options at will. Index options are cash-settled, and the buyer of the option is credited with the difference between the strike price and the settlement price.

For instance, a buyer of a call option with a strike price of $1000 would be credited $10,000 if the underlying index were at $1100 (1 x $100x 100 multiplier). The index settles based on a snap shot (last trade for each stock in the basket) called the set. That determines the cash settlement value. The most common indices are OEX (S&P 100 ), SPY (S&P 500 Depository Receipt), SPX (S&P 500 Cash) and NDX (Nasdaq 100) and the QQQQ (QQQ Powershares).

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