Nasdaq index options are option contracts in which the underlying value is based on the level of the Nasdaq , a stock market index which contains of the largest non-financial securities based on market capitalization listed on the Nasdaq stock exchange. The Nasdaq index option contract has an underlying value that is equal to the full value of the level of the Nasdaq index.
To meet the needs of retail investors, smaller sized contracts with a reduced notional value are also available and goes by the name of Mini-NDX. If you are bullish on the Nasdaq , you can profit from a rise in its value by buying Nasdaq NDX call options. On the other hand, if you believe that the Nasdaq index is poised to fall, then NDX put options should be purchased instead. The following example depict a scenario where you buy a near-money NDX call option in anticipation of a rise in the level of the Nasdaq index.
Note that for simplicity's sake, transaction costs have not been included in the calculations. You observed that the current level of the Nasdaq index is 1, The NDX is based on the full value of the underlying Nasdaq index and therefore trades at 1, With the NDX now significantly higher than the option strike price, your call option is now in the money. By exercising your call option, you will receive a cash settlement amount that is computed using the following formula:.
So you will receive 1, In practice, it is usually not necessary to exercise the index call option to take profit. You can close out the position by selling the NDX call option in the options market. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires. In the example above, as the option sale is performed on expiration day, there is virtually no time value left.
The amount you will receive from the NDX option sale will still be equal to it's intrinsic value. One notable advantage of the long Nasdaq call strategy is that the maximum possible loss is limited and is equal to the amount paid to purchase the NDX call option.
Now, in this scenario, it would not make any sense at all to exercise the call option as it will result in additional loss. Fortunately, you are holding an option contract, and not a futures contract, and so you are not obliged to anyway.
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk.
A most common way to do that is to buy stocks on margin Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.
They are known as "the greeks" Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account.
You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service.
Toggle navigation The Options Guide. Limited Unlimited Loss Potential: The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose.More...