![]() ![]() That’s an example of how the market for index options, historically an institutional market – meaning banks and hedge funds used them, but not many individuals – has evolved to meet demand. There are also smaller notional index products based on the NDX, like NQX and XND. So, examples of index options would be NDX index options where the underlying index is the NDX. Great question – it goes back to the definition we started with and bears repeating.Īn index option is a financial derivative contract whose value is derived from an underlying stock market index. Much more manageable for many market participants.Ģ. Consequently, one XND option would have a notional value of ~$15k. So, if the NDX measures 15,000, XND would be measuring around 150. ![]() So, the industry began introducing smaller notional index products like Nasdaq-100 Reduced-Valued Index Options (NQX), which is 1/5 th the size of the full NDX, as well as Nasdaq-100 Micro Index Options (XND), which is 1/100 th the size of the full index. The problem there is that many options users were implicitly excluded from using index options because the premiums were large, and that exposure was too big for many accounts. They can hedge or gain exposure to an index’s value with relatively few contracts. The large value is something that institutional clients value. For example, if the NDX measures 15,000 and an index option affords exposure to 100 units of the underlying, then the notional value of ONE call or put = $1.5M. These options often have significant notional values. It’s simply a representative number, but the derivative industry has evolved, and since the early 80s, you could buy or sell calls and puts linked to the value of an index like the NDX or S&P 500 Index (SPX). There are other differences too.Īn index is a measurement tool. There’s a degree of diversification that’s different than standard equity options. Whereas the NDX includes all those securities (with different weights) and about 96 others. They are also excluded.īy contrast, an equity option references a single security like Apple or Amazon or Tesla or Netflix. ![]() The NDX includes stocks from a variety of sectors, but as mentioned Financials are excluded, and there is no “Old Energy” or Real Estate investment trusts. The NDX is designed to measure the performance of the 100 largest Nasdaq-listed NON-FINANCIAL companies. So, examples of index options would be Nasdaq-100 Index Options (NDX), where the underlying index is the Nasdaq-100 Index (NDX). Let’s start with a definition to level set: An index option is a financial derivative contract whose value is derived from an underlying stock market index. ![]()
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