Index Options Explained

An index level is not a share price

An index summarizes a basket according to a defined calculation method. An index option references that value, or a scaled version of it. Buying the option does not buy all the component shares. A conventional cash-settled call has value at expiration when the official settlement value exceeds its strike; a put has value when settlement is below its strike.

Points become money through the multiplier

An option premium of 12 points with a USD 100 multiplier costs USD 1,200 for one contract. The same 12-point quote with a GBP 10 multiplier means GBP 120. Contract count multiplies that amount again. Read the option’s underlying scale separately: a mini index may reduce the level while retaining the same cash multiplier.

The right and the obligation

The buyer pays for a right and can lose the entire premium. The writer receives premium while accepting a cash obligation if the option finishes in the money. A short call can have unlimited loss potential; a short put can create a large loss if the index falls. Margin posted is collateral, not a maximum-loss calculation.

Choose the benchmark before the structure

A broad large-cap index, a small-cap index and a concentrated non-financial index are different exposures. A portfolio hedge should reflect that distinction. Once the underlying is chosen, compare calls, puts and spreads on that same contract and settlement series. The individual market guides below explain the main differences.

Explore the markets

Explore a payoff

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