<topic sku="dlxbiz" tNum="289656" author="sallyh" xmlns="x-schema:hhTopicSchema.xml"><index><title>Learn about index options</title><category fLocale="cdn">investing</category><klink type="cncpt">Tell me about index options</klink></index>
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<p>Unlike equity options, index options are based on an intangible underlying instrument<mdash/>an equity index. The price of an index call generally increases as the level of its underlying index increases, while the price of an index put generally increases as the level of its underlying index decreases. Index options relate to the value of the underlying index of stocks times a multiplier<mdash/>generally U.S. $100.</p>
<p>Purchasing an index option does not give you the right to purchase or sell all of the stocks that are contained in the underlying index. Instead, purchasing an index option is basically buying an intangible, representative value that changes with market and price fluctuations.</p>
<p>The strike price of a cash-settled index option is the basis for determining the amount of cash, if any, that you will receive upon exercise or expiration of the option. The amount of cash you receive is called the exercise settlement amount, and is calculated as the difference between the strike price of the option and the level of the underlying index reported as its exercise settlement value, or exercise price. This is the option's intrinsic value, and is generally multiplied by $100. If you hold a call and the underlying index value is above the strike price, you may exercise the option and receive the exercise settlement amount. If you hold a put and the underlying index value is below the strike price, you may exercise the option and receive the exercise settlement amount.</p>
<p>For example, if you hold a call for index options with a strike price of $1,000, and the exercise price is $1,010, you may exercise the option and receive $1,000 (a difference of $10 multiplied by 100).</p>
<p>Although equity option contracts generally have only American-style expirations, index options can have either American- or European-style expirations.
Holders of American-style options have the right to exercise them on or at any time before its expiration date. Holders of European-style options can only exercise them during a specified period of time prior to its expiration.</p>
<p>Premiums for index options are quoted in dollars and decimal amounts. The amount you pay is generally the premium amount multiplied by $100 for the contract.</p>
