Question about INDEX Options / Newbie to options

[Johnni.h]

Hi guys,

I am trying to understand options but am having trouble understanding INDEX options for index's such as SPX or ES.

How can there be options traded for an INDEX when you cannot physically purchase equity in an index?

For example, If a call option expires above the strike price and gives me right to buy SPX at a later date, I can not physically purchase the S&P 500...

Can anyone please clear up my misunderstanding.

 

[tommcginnis]

Hi guys,

I am trying to understand options but am having trouble understanding INDEX options for index's such as SPX or ES.

How can there be options traded for an INDEX when you cannot physically purchase equity in an index?

For example, If a call option expires above the strike price and gives me right to buy SPX at a later date, I can not physically purchase the S&P 500...

Can anyone please clear up my misunderstanding.

The idea you're looking for is the underlying instrument. For equity options it's easy: it's the stock itself. For commodity futures, it's a future contract for a lot of that commodity (watch out for the term "physical delivery"!) or for a cash difference. For indexes, it's either a future contract (ES for Mar/Jun/Sep/Dec) or the cash difference (most ES, and SPX). Whatever platform you're trading, when you click on the data line for the option contract, there will be a statement of what the underlying is -- cash difference to market, or physical delivery (of stock or commodity)...

 

[ironchef]

@tommcginnis gave you answers from a professional's perspective, here is my non-financial newbie's understanding of index options:

Options are derivatives of the underlying, i.e., a side bet of the underlying's performance.

The underlying can be commodities, stocks, currencies, futures... or indices. At the end of the betting period, there will be deliverables, in commodities they are the commodities, in stock the stocks, in indices, it is cash settled - you deliver/receive cash based on the value of the underlying indices at the time of the settlement.

@tommcginnis, correct me if I am wrong.

 

[Johnni.h]

The idea you're looking for is the underlying instrument. For equity options it's easy: it's the stock itself. For commodity futures, it's a future contract for a lot of that commodity (watch out for the term "physical delivery"!) or for a cash difference. For indexes, it's either a future contract (ES for Mar/Jun/Sep/Dec) or the cash difference (most ES, and SPX). Whatever platform you're trading, when you click on the data line for the option contract, there will be a statement of what the underlying is -- cash difference to market, or physical delivery (of stock or commodity)...

Thank you... It makes sense that there is no physical delivery but I am still a little confused. Because with futures and options, no real commodity is is ever being physically delivered, would trading an index be equivalent to placing a bet (since it is only cash difference there is no real delivery) ?

 

[tommcginnis]

Thank you... It makes sense that there is no physical delivery but I am still a little confused. Because with futures and options, no real commodity is is ever being physically delivered, would trading an index be equivalent to placing a bet (since it is only cash difference there is no real delivery) ?

• Physical Delivery is a real thing -- various traders relate stories of when they had to face the disposition of 8 gabillion bushels of feed corn with a 30-day warning....! But brokers have restrictions in place to prevent retail positions that would result in physical delivery orders. That doesn't mean that you can't take those positions -- it means you had better be *out* of them before your broker steps in, as your exit requirements might not be very attractive.

• Is trading an index equivalent to placing a bet? Getting up in the morning is equivalent to placing a bet. Driving to the grocery store is equivalent to placing a bet. Having kids. Taking this job over that one. Choosing this computer over that one. Platforms & brokers? Same thing. Commodities or equities? Yup. Calls or puts? Hey.