Investments, tenth edition

  Other Listed Options 

 Options on assets other than stocks are also widely traded. These include options on mar-

ket indexes and industry indexes, on foreign currency, and even on the futures prices of 

agricultural products, gold, silver, fixed-income securities, and stock indexes. We will dis-

cuss these in turn. 

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P A R T   V I

  Options, Futures, and Other Derivatives

  Index Options   

An index option is a call or put based on a stock market index such 

as the S&P 500 or the NASDAQ 100. Index options are traded on several broad-based 

indexes as well as on several industry-specific indexes and even commodity price indexes. 

We discussed many of these indexes in Chapter 2. 

 The construction of the indexes can vary across contracts or exchanges. For example, 

the S&P 100 index is a value-weighted average of the 100 stocks in the Standard & Poor’s 

100 stock group. The weights are proportional to the market value of outstanding equity 

for each stock. The Dow Jones Industrial Index, by contrast, is a price-weighted average 

of 30 stocks. 

 Option contracts on many foreign stock indexes also trade. For example, options on 

the (Japanese) Nikkei Stock Index trade on the Singapore as well as the Chicago Mercan-

tile Exchange. Options on European indexes such as the Financial Times Share Exchange 

(FTSE 100) trade on the NYSE-Euronext Exchange. The Chicago Board Options Exchange 

also lists options on industry indexes such as the oil or high-tech industries. 

 In contrast to stock options, index options do not require that the call writer actually 

“deliver the index” upon exercise or that the put writer “purchase the index.” Instead, a 

cash settlement procedure is used. The payoff that would accrue upon exercise of the 

option is calculated, and the option writer simply pays that amount to the option holder. 

The payoff is equal to the difference between the exercise price of the option and the 

value of the index. For example, if the S&P index is at 1400 when a call option on the 

index with exercise price 1390 is exercised, the holder of the call receives a cash pay-

ment of the difference, 1400 2 1390, times the contract multiplier of $100, or $1,000 per 

contract. 

 Options on the major indexes, that is, the S&P 100 (often called the OEX after its 

ticker symbol), the S&P 500 (the SPX), the NASDAQ 100 (the NDX), and the Dow Jones 

Industrials (the DJX), are the most actively traded contracts on the CBOE. Together, these 

contracts dominate CBOE volume.