An equity index option is simply the right to buy or sell a security in the future, where the security is an equity index. A call option generally goes up as the price of the index goes up where a put option goes up as the price of the index goes down. An index is generally less volatile than an individual component stock. As such the price of the option is generally also more stable.
- The underlying index determines the rise and fall in the market value of the put and call of an index.
- An equity index has intangible assets, that is, not cash or liquid, and its instruments are based on equities.
- Factors affecting the price of an index option are generally the same factors that affect the price of an equity option.
“An investor purchasing an index option obtains certain rights per the terms of the contract. In general, this includes the right to demand and receive a specified amount of cash from the writer of a contract with the same terms.”