Introduced in 1981, index options are options whose underlying is not a single stock but an index comprising many stocks. Index calls and puts allow investors to gain exposure to the entire market or specific segments of the market with a single trading decision and often thru one transaction. Obtaining the same level of diversification using individual stocks or individual stock options require numerous transactions and consequently slower decision making and higher costs.

Like equity options, index options offer the buyer leverage and predetermined risk. Index options offers leverage to the index option buyer as the premium paid relative to the contract value is small. Consequently, for a small percentage moves of the underlying index, the index option holder can see large percentage gains for his position. Furthermore, risk is predetermined as the most the index option buyer can lose is the premium paid to hold the options.

Index options typically have a contract multiplier of $100. The contract multiplier is used to compute the cash value of each index option contract.

Similar to equity options, index options premiums are quoted in dollars and cents. The price of a single index option contract can be determined by multiplying the quoted premium amount by the contract multiplier. This is the amount that an index option buyer will need to pay to purchase the option and the amount that the index option writer will receive when selling the option.

As index options are cash-settled options, the holder of an index option does not possess the right to purchase or sell the underlying stocks of the index but rather, he or she is entitled to demand the equivalent cash value from the option writer upon exercising his option.

Index options are a great way to trade. They allow you to place trades based on the movement of a basket of stocks, which has advantages compared to selecting and trading numerous individual stocks. In addition, index options are highly liquid trading vehicles. Securities based on indices, such as index funds, index futures and index options, offer investors a way to diversify their portfolio without the need to buy or sell multiple securities. The resultant benefits include less monitoring and lower transaction fees.

One popular index option is the option on the NASDAQ-100 Index (NDX). NASDAQ-100 Index options allow you to speculate on the future direction of the Nasdaq-100 Index. With NDX, you trade an option on the underlying basket of stocks that represented in the NASDAQ 100 index. The NASDAQ-100 Index comprises the largest non-financial companies listed on the NASDAQ stock market. Most of the 100 issues are well known companies, such as Microsoft, Qualcomm, Intel, and Cisco Systems.

Another index with high liquidity is the S&P 100 (OEX). OEX options allow you to speculate on the movement of the S&P 100 Index. The OEX consists of 100 blue-chip stocks from diverse industry groups - they provide a good measure of the market s overall performance.

S&P 500 (SPX) Index options are among the most highly liquid options on the market. The S&P 500 Index is comprised of 500 leading companies (most of them listed on the NYSE) from a diverse array of industries.

Dow Jones Industrial Average Index options (DJX) enable you to speculate on the future direction of the Dow. Since their introduction in 1997, DJX Index options have grown to become one of the most popular index options. DJX options are also a highly liquid trading vehicle.