Understanding index options trading

Index trading options

Indices are one of the most traded options, they are popular with both seasoned and beginner traders alike. They offer diversity to your stock portfolio, they can be very profitable and lots of fun to trade.

If you are new to options trading then you may not be too familiar with index options trading but over the course of the next few minutes, this post aims to give you the complete run down on everything you need to know about index options. From what they are, through to how you can start trading in them and why you need them in your stock portfolio.

Understanding Index Options

First of all though, let us kick things off by discussing a little bit about what exactly these index options mean. An index option is an option on a particular stock market – a financial derivative of a particular stock market if you will. An index option (in its most simple sense) gives the person who holds it the option, but not the obligation, to purchase stock market shares at a pre arranged price which is below that of the standard tracking rate at that given moment in time. Sound confusing yet? Don’t worry, because it is really a whole lot simpler than it sounds at first.

Taking out an index option means that you essentially secure a deal to buy or sell stocks in a given company or organisation. But what makes options a bit more special than a standard stock purchase is that they are dealt in future dates. So for example, you could end up taking out an option to buy 1000 shares of Company A on 1st March for a pre agreed price.

The advantages of trading Indices

There are many advantages to trading index options, you see, when you take out an index option, you are only securing yourself the possibility of making the agreed purchase. Even after taking out the index option, you are not actually liable to be bound to the deal. This means that if it comes around to the agreed purchase date, and you have for some reason changed your mind about the deal, you are perfectly free to abandon it there without losing out on anything or ending up getting yourself into any trouble for backing down on a deal.

Traders use index options as a way to diversify their investment profiles, spreading the risk that comes with some of the more edgy types of financial trading. When the time comes and you find yourself on deal day, having the option to drop the deal and back out before things go any further can be a great way to manage your spare cash. If you don’t have the money liquidised at that particular moment in time, you can leave the deal on the table – you’re not bound by any agreements.

If you are interested in trading binary options trading then index options are a good place to start-out and cut your trading teeth. With a little online research, you can find all the pertinent information that you need to trade indices successful.