An Index option is one whose underlying asset is a stock index. Thus, with index options, traders can trade stock groups, segments or even entire equity baskets in the market, without trading individual stock options. Investors and traders can buy or sell an underlying index for a specific time period using index options and can diversify their portfolios. The two basic and popular index options are ‘Call Option’ and ‘Put Option’. A Call Option gives the buyer a ‘right’ (but not an obligation) to buy a specific quantity of an underlying index at a pre-decided price, against an upfront premium to the seller or writer. A Put Option gives the buyer a ‘right’ to sell a specified quantity of an underlying index at a pre-decided price, against an upfront premium to the Put option seller or writer. Index options, which have a monthly expiry, expire on the last Thursday of every month.
