Options Trading

Index options and options on the ETFs (Exchange Traded Funds) that track indexes is one of the most popular way to trade. These options allow placing trades based on the trend of a basket of stocks, which has number of advantages when compared to selecting, analyzing and trading several individual stocks. Plus, index and ETFs (that track indexes) options are highly liquid and easy to buy/sell any time trading vehicles.

Below we discuss some of the most liquid index options available on the market today. High liquidity means high trading volume and it means you can easily open and close a position. Other options on indexes are available as well; however, not all of them not provide the same high degree of liquidity as the ones listed below. If you think that you would rather speculate on the market's or industry's (covered by index) general direction rather than spend time and resources on analysis of several of individual stocks, then trading options on indexes might be your choice.

NASDAQ 100 (NDX) Index Options

The NASDAQ-100 Index was introduced in January 1985 and it covers the top 100 of the largest non-financial companies listed on the NASDAQ stock Exchange. Most of these companies are well known companies, such as Microsoft, Apple, Google, Intel, Qualcomm, and Cisco Systems.

The options on the NASDAQ-100 Index were first traded on the CBOE (Chicago Board Options Exchange) in February 1994.

Since the stocks listed in the NASDAQ-100 Index could be very volatile, the NASDAQ-100 Index options prices can also be volatile significantly.

There is number of ways to invest in the NASDAQ-100 index:

• You may purchase the contracts of NASDAQ-100 (NDX) Index Options . Each NDX options contract controls 100 shares and if, as an example by assuming a NASDAQ-100 Index price of $2,000, you could leverage $200,000 of equity with a single NDX option contract;
• You may buy mini-NDX index options (MNX). The MNX option contract price is calculated as 1/10 of the NASDAQ-100 Index value. As an example, by assuming a mini-NDX contract costs $2,000, you would control $20,000 of equity with a single MNX contract which is 10 times smaller then with NDX options contract;
• You can buy and sell the NASDAQ-100 Tracking Exchange Traded Funds (QQQ stock as an example). One QQQ share is approximates 1/40 of the current value of the NDX index. As an example example, if the NDX's current price is $2,000 then the QQQ stock price would be approximately $50 per one share;
• At the same time you can trade options on the NASDAQ-100 Index ETFs options - QQQ options as an example. If a QQQ trades at $50 then one option contract would control $5,000 of equity.

The QQQ Options are in the list of the most liquid options that are currently traded on the market. They could be recommend as a relatively low risk possibility of leveraging a part of your portfolio.

OEX (S&P 100 index) Options

OEX (also called S&P 100 index) options give you a ability to speculate on the trends of the S&P 100 index ("Standard and Poors S&P 100 Stock Index"). The OEX index comprises 100 blue-chip stocks from various industry groups by providing a good measurement of the overall market's performance. The S&P 100 index is a subset of the S&P 500 index - the stocks listed in the OEX index are also listed in the 500 index. The stocks listed in the S&P 100 index are not equally waited - the larger a stock is, the greater its influence on the value of total index.

Traders have been investing into the OEX options since 1983. More than one 1B S&P 100 options have been traded since then which makes the S&P 100 as one of the most popular equity portfolio management tools.

In February 2001, options the S&P 100 Exchange Traded Funds (iShares S&P 100 - symbol OEF) were introduced.

In July 2001, the S&P 100 options with European-style exercise (symbol XEO) were introduced by CBOE.

The OEX options are attracting the investors for several reasons:

• You may trade OEX options rather than analyzing (could be quite complicated) and investing in the individual stocks listed in the S&P 100 index. This reduces the number of trades, time spent on analysis and making decisions greatly;
• Buying S&P 100 options is is considered less risky by comparing to the buying and selling several individual stocks;
• Investing into OEX options requires less capital in comparison to the trading the options of individual stocks.

SPX (S&P 500 Index) Options

The SPX (S&P 500 index) options are in the list of the most highly liquid (highly traded) options on the market. The S&P 500 index considered as one of the best barometer of the overall US market and US economy. It consist of 500 biggest and leading companies traded on the NYSE and NASDAQ exchanges.

Monthly SPX option contracts are available for the three coming months. LEAPS (long-term contracts) options are also available for the S&P 500 Index. The SPX options strike prices are usually moves in intervals of 25 points.

The same as with other index options the most attractive in investing into the S&P 500 is:

• The SPX options reflects the S&P 500 Index performance - the leading benchmark of the market sentiment for investors;
• by investing into the SPX options investors invest into a cumulative basket of a 500-stocks;
• Trading the S&P 500 index options requires less capital than trading the options of individual stocks;

Dow Index options (DJX)

The DJI (Dow Jones Industrial Average Index) options (DJX) enable the trader to trade on the future trend of the Dow index. Since their lunch in 1997, DJX options have became one of the most traded index options. These option contracts are based on the Dow Jones Industrial Average (DJIA) - one of the oldest U.S. market index (introduced 1896).

For individual investors, the Dow Index is the world's best known benchmark index. It consist of 30 large and strong companies. The Dow Jones Industrial index is the most analyzed and followed index all around the globe and it is considered a leading trading indicator which reflects the health of the U.S. market.

The DJX options value is calculated as 1/100 of the value of the DJIA index. As an instance, when the Dow index is traded at $12,000, the DJX options contract will cost at above $120. As a rule the DJX option contracts strike prices are set in intervals of 100 points.

The DJX Index options contracts are heavily traded for several reasons:

• they track the DJIA index - the oldest and best known index that is used by many professional and retail investors as trading indicators of the U.S. market's overall performance;
• these contracts allow trading a cumulative basket of a 30 stocks which means traders can invest into DJX Index options instead of having to analyze and trade 30 individual stocks that are listed in the DJIA.
• these contracts are a highly liquid trading instrument.

QQQ Options

The QQQ options the same as QQQ stock (Exchange Traded Fund) are based on the NASDAQ-100 Index and are very popular in recent years due its relatively low required amount to speculate on the Nasdaq 100 index's movements. These options are some of the most liquid options on the market - You may very easily buy and sell three closest expirations.

QQQ options are options on the NASDAQ-100 Index Tracking Stock and have become very popular in recent years. The most liquid options currently traded on the market are the QQQ options. The QQQ, also known as the "cubes" or ("Qubes"), are an example of an exchange-traded fund (ETF). Because ETFs track major stock indexes , they can be traded just like a regular stock. The QQQ track the NASDAQ-100 Index, which consists of 100 of the biggest and most important stocks of the NASDAQ Composite Index.

The most liquid index options available today are discussed above. High liquidity means you can easily get in and out of a position. Although other index options are available, most do not provide the same degree of liquidity as the ones discussed. Trading index options might be just for you if you would rather speculate on the general direction of a basket of stocks (i.e., an underlying index) than analyze a number of individual stocks.

Summary - Why Trade Index Options?

1. Less uncertainty: Because the price and volume fluctuations are much higher for a particular stock than they are for an index, that is the key reason why we trade index options rather than options on individual stocks. Stocks often react wildly to unpredictable events, such as rumors, news earning reports and others. We have greatly lowered the degree of uncertainty that is associated with the trading of individual stock options by tailoring our trade indicators to the trading of index options on the NASDAQ 100, S&P 100 and the S&P 500.
2. Lower Capital Investment: buying into the index directly is as easy as buying into a stock. Because there is no need to worry about loads or other hidden fees, you end up with low commissions.
3. Reduced volatility: Indexes are much less volatile than their constituent stocks. A sudden volatile even on an individual stock (news, earnings, up-/downgrades, etc.) will not impact the index to the same degree that it impacts the stock itself, because an index is comprised of many individual stocks. The price movements in the index are much less pronounced and volatile due to the presence of many other stocks in the index which tend to smooth out or buffer such impacts.