Index Option

An index option is a cash-settled option on an underlying index or an option on an index future, giving holders the option but not the obligation to go long or short an underlying index. The so-called strike price or exercise price used in the options contract is used to calculate the settlement value at expiry. Option traders who buy call options i.e. are long the index will exercise the option at expiry against the short seller (via the exchange) if the index is higher (‘in the money’) than the strike price at expiry. The amount by which an option is in the money is known as its intrinsic value. If the option has no residual value at expiry, no cash settlement takes place. The value of index options will rise or fall depending on a range of factors, including the value of the index, volatility, time to expiry and interest rates.

Related terms