Imagine having the power to invest in the entire market with just one trade, reaping substantial rewards if your predictions come true. Whether you're hedging against downturns or strategizing on upswings, index options offer a flexible way to navigate market trends. Let's explore how these versatile instruments can enhance your investment strategy.
Options = Market Insurance? Discovery why!
Before we begin, let's review some basic knowledge about options. Options are financial derivatives whose prices are influenced by the fluctuations of their underlying assets. Simply put, you can think of options as insurance. Buying an option is like buying insurance; if an unexpected event occurs, the insurance company will provide us with compensation, which is usually substantial. In options products, this translates to having the right to exercise the option and gain profits when the underlying asset rises or falls to a certain range. Of course, there's no free lunch. To obtain this right, we need to pay an option premium, just like paying an insurance premium. If you haven't had experience with options before, we recommend you read our options learning course. This will help you better understand index options.
Read More: Option Trading Explained
Different Underlying Assets: Indices vs Stocks
Now, back to stock index options. The biggest difference between stock index options and stock options is their underlying assets. Stock options have stocks as their underlying assets, such as Tesla or Apple, while stock index options have indices as their underlying assets, such as the S&P 500 index. For example, if you believe the S&P 500 will surge soon, you can buy S&P 500 call options. If your judgment is correct, congratulations, your investment return will be very high!
There are two main types of options linked to the S&P 500 index: SPX and SPXW. The primary difference between them is their expiration dates. SPX typically expires monthly and is suitable for long-term strategies, while SPXW expires weekly and is more suitable for short-term trading.
Turn Volatility into Opportunity with VIX Options
Besides S&P 500 options, there are some alternative stock index options, such as VIX index options (VIX and VIXW). Their underlying asset is the VIX index, also known as the fear index. Generally, when the market encounters a black swan event, the VIX index will rise, and buying VIX call options can be profitable. A black swan event refers to a rare, unpredictable occurrence that has severe consequences. When such events happen, markets usually become highly volatile. For example, when Silicon Valley Bank suddenly went bankrupt, causing market panic, the VIX index surged. Therefore, when you believe market volatility will increase, buying VIX call options is usually a good choice.
Now that everyone has grasped the basic concepts of stock index options, in our next lesson, we'll discuss which is more profitable: stock index options or stock options? Remember, options trading involves high risk. New investors should proceed with caution and thoroughly study before diving in.
