Why You Should Trade Index Options

Submitted by Stock Market News on 2 June, 2011 - 17:50

Advantages of Index Options

Trading a variety of stocks and entering in different positions can be a tricky to manage. Unless you an experienced trader with a knack for multi tasking this can prove to be difficult. But there is a way that you can access the stock market in one transaction. The stock market offers a variety of financial commodities that you can trade other than the common shares. Trading index options is a good way to gain access to a wide range of markets.

Index options

Index option is a call or put in a financial index. In basic terms, it’s betting your money on the overall movement of an index that represents a basket of stocks. So you have a broader exposure in just one transaction. Instead of replicating a number of option positions across different stocks, you can make a move on the market as a whole.

Leverage

We all know that options give you leverage. With index options, you get leveraged exposure on the overall market movement. If the index option moves in your favour, the percentage of returns that you will get is significantly higher than the percentage you will earn from the movement within the index.

Protection

You can use an index option to diversify your portfolio. The principle is pretty much the same as using options to protect your shares against a falling price. If you think that there will be a significant fall in the share market, you can buy an index put which can protect your portfolio, which can be done in one transaction. This saves you the hassle of protecting all your stocks with share options one at a time.

If you have a broader view of the market index options are great for hitting several birds with one stone.