What are Index Options?
Index options are the call or put options on the stock market indices. Sometimes people confuse them with index fund. But let me tell you both are completely different. Well, in India, index options are traded commonly on two stock exchanges – Bombay stock exchange and National Stock exchange. The market indices for BSE is Sensex and NSE is Nifty. Sensex options are European type options that expires on last Thursday of the contract month.
Put and call index options with maturity of 1 month, 2 month and 3 month are available here. The settlement takes place in T+1 basis. In addition to this, prices are based on the expiration price which is decided by the exchange. Moreover, option contracts have a multiplier of 100. On the other hand, the multiplier for the NSE Nifty options is 200 with a minimum price change of Rs 10 ( 200 × 0.05).
Index Options Example
Let’s assume, you want to invest in these options. Now assume you are bullish on the Sensex and buy one January call option at 4000 @ 10 rupees premium. In terms of value it is, 4,00,000 (4000 × 100). Now suppose on expiration, Sensex closes at 4150, you gain 15,000 on an investment of Rs. 1000 that is (10 × 100).
Moreover, the exchange provides detailed information about individual stock options. There is information on contract specifications, price, turnover and open interest and order book. The price information may consists of previous day’s closing price and the opening and closing price as well as the high, low and average price for the day.