DATE: December 16, 2013
Why do they call an index option an index option?
There are two general types of options that are traded at securities exchanges in the United States. The first and oldest type of option is the stock option, introduced by The Chicago Board Options Exchange in 1973. The CBOE then introduced a second type of option ten years later, the index option.
These options have different names because they have different contract specifications. Such as underlying, delivery and exercise, last trading day and settlement price.
The first major difference is the underlying, stock options have shares of a specific stock such as Google or Ford for an underlying. An index option, however, has an underlying of a market index (hence the name “index" options) of many stocks such as the S&P 500 Stock Index or the Dow Jones Industrial Average.
Another key difference is what is delivered when an option is exercised. For a stock option, 100 shares of the specific stock are delivered. For an index option, the in-the-money cash value of the option is delivered.
For more information on index options, please view this week's "Ask the Institute."