Versatility and Profitability of Index Options Strategies

Index options are good and profitable as financial derivatives. Get to know more about index options strategies and factors that make them versatile and popular.

Index options are great financial derivatives. Just like other investment instruments or derivatives, they secure for you profitable return from the price movement of a security without actually owning it at that instant. Index option is one of the most popular and versatile money making avenues, primarily because of several strategies available to the investors.

What Makes Index Options Strategies Win?

Proper implementation of index options strategies have proved fruitful for options investors. You can implement the following basic strategies:

1. Buying Index Calls
2. Buying Index Puts
3. Selling Index Calls
4. Selling Index Puts

Index option is highly beneficial because it provides opportunity to either profit out of an expected move in the stock market or be able to protect holdings in underlying instruments. In this respect index based options is similar to equity options. The only difference between the two, is that in case of the first one, the underlying instruments are indexes. Whether the characteristics of the broad equity market or specific industry sectors - indexes can reflect either of them.

Moreover, as an investor you are at an advantage, because you can gain access to the stock market as a whole or lay hands on specific pockets of the market while taking a trading decision and making one transaction. But for individual stock issues or classes of equity option, you would have required several decisions and transactions.

There's another positive side of the option being discussed. As a buyer, you are not exposed to limitless risk alike other financial instruments. The risk factor is known and you stand at no major loss, except the premium, which is the initial price of the option. The predetermined risk level is one of the top features of this trading that can be leveraged to make high profit out of relatively small amount invested (the invested amount is called premium) for the contract. In fact with a tiny sum of money, you can get access to wide stock market. As the index moves favorably, you can gain a large amount of money in return. Even if the move of the index is not as per the anticipation, your risk is limited to a petty investment amount. This is definitely a great leveraging factor, but it has a flip side too. If there is an adverse trend in the market, it is likely to result in substantial or total loss of the premium amount.

To sum it up, index option makes it easy for you to access pricey assets at a low price and with greater flexibility. It forms one of the most preferred modes of trading, opening up numerous opportunities based on the performance of underlying indexes.

If you are keen to try out trading with indexes as underlying assets, you should better have the knowledge of available index options strategies and stock market updates. Keep an eye of Momentum Options newsletters for all these and more.

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Keywords: Index Option Strategies, Subscription, put option and call option

By: Christina Benson

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