Nasdaq 100 index options are option contracts in which the underlying value is based on the level of the Nasdaq 100, a stock market index which contains 100 of the largest non-financial securities (based on market capitalization) listed on the Nasdaq stock exchange. Included companies are from across major industry groups such as computer hardware and software, retail/wholesale trade, telecommunications and biotechnology.
The Nasdaq 100 index option contract has an underlying value that is equal to the full value of the level of the Nasdaq 100 index. The Nasdaq 100 index option trades under the symbol of NDX and has a contract multiplier of $100.The NDX index option is an european style option and may only be exercised on the last business day before expiration.
To meet the needs of retail investors, smaller sized contracts with a reduced notional value are also available and goes by the name of Mini-NDX.The Mini-NDX index option trades under the symbol MNX and its underlying value is scaled down to 1/10th of the Nasdaq 100.The contract multiplier for the Mini-NDX remains the same at $100.
|Product Name||Symbol||Underlying Value||Contract Multiplier||Exercise Style|
|Nasdaq 100 Options||NDX||Full Value of Nasdaq 100||$100 |
(Full Contract Specs)
|Mini-NDX Options||MNX||1/10th of Nasdaq 100||$100 |
(Full Contract Specs)
If you are bullish on the Nasdaq 100, you can profit from a rise in its value by buying Nasdaq 100 (NDX) call options. On the other hand, if you believe that the Nasdaq 100 index is poised to fall, then NDX put options should be purchased instead.
The following example depict a scenario where you buy a near-money NDX call option in anticipation of a rise in the level of the Nasdaq 100 index. Note that for simplicity's sake, transaction costs have not been included in the calculations.
You observed that the current level of the Nasdaq 100 index is 1,251.47. The NDX is based on the full value of the underlying Nasdaq 100 index and therefore trades at 1,251.47. A near-month NDX call option with a nearby strike price of 1,300 is being priced at $83.43. With a contract multiplier of $100.00, the premium you need to pay to own the call option is thus $8,343.00.
Assuming that by option expiration day, the level of the underlying Nasdaq 100 index has risen by 15% to 1,439.19 and correspondingly, the NDX is now trading at 1,439.19 since it is based on the full value of the underlying Nasdaq 100 index. With the NDX now significantly higher than the option strike price, your call option is now in the money. By exercising your call option, you will receive a cash settlement amount that is computed using the following formula:
Cash Settlement Amount = (Difference between Index Settlement Value and the Strike Price) x Contract Multiplier
So you will receive (1,439.19 - 1,300.00) x $100 = $13,919.05 from the option exercise. Deducting the initial premium of $8,343.00 you paid to buy the call option, your net profit from the long call strategy will come to $5,576.05.
|Profit on Long NDX 1300 Call Option When Nasdaq 100 at 1,439.19|
|Proceeds from Option Exercise||=||Cash Settlement Amount|
|=||(Index Settlement Value - Option Strike Price) x Contract Size|
|=||(1,439.19 - 1,300.00) x $100|
|Investment||=||Initial Premium Paid|
|Net Profit||=||Proceeds from Option Exercise - Investment|
|=||$13,919.05 - $8,343.00|
|Return on Investment||=||Net Profit / Investment|
In practice, it is usually not necessary to exercise the index call option to take profit. You can close out the position by selling the NDX call option in the options market. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.
In the example above, as the option sale is performed on expiration day, there is virtually no time value left. The amount you will receive from the NDX option sale will still be equal to it's intrinsic value.
One notable advantage of the long Nasdaq 100 call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the NDX call option.
Suppose the Nasdaq 100 index had dropped by 15% instead, pushing the NDX down to 1,063.75, which is way below the option strike price of 1,300. Now, in this scenario, it would not make any sense at all to exercise the call option as it will result in additional loss. Fortunately, you are holding an option contract, and not a futures contract, and so you are not obliged to anyway. You can just let the option expire worthless and your total loss will simply be the call option premium of $8,343.00.
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