What is a stock index option?

An "equity index option" is a financial derivative whose underlying value is an equity index, such as the AEX, S&P 500, or FTSE 100. It gives the holder the right, but not the obligation, to take a position in that index at a specific time, at a predetermined price. Instead of trading in an individual share, the investor speculates or protects the broader movement of the entire stock market with this option.

There are two types of stock index options: call options and put options:

• A call option gives the holder the right to profit from an increase in the stock index.
• A put option offers the possibility to profit from a fall in the stock index.

Options can be traded on various exchanges, such as Euronext.liffe, where they are listed in different forms, for example as standard index options or as 'light options' (e.g. 1/10th of the index). This allows both large institutional investors and smaller retail investors to trade in the expected price movements of a stock index without actually having to buy or sell the shares themselves.

Key features of stock index options:

• Underlying value: Always a stock index.
• Cash settlement: With exercise, there is no physical delivery, but the difference in value is settled in cash.
• Protection and speculation: Investors use these options both to protect themselves against market volatility and to profit from market movements.