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Index Options: Advantages in Trading Index Options

Index Options: Advantages in Trading Index Options

Index Options Trading

Index options are those whose underlying asset is not a single stock of a company, but an index comprising of many stocks. When an investor chooses to purchase index options, he wishes to diversify and gain exposure to a wider section of the market than he would do with a single stock option. To obtain this same level of exposure with individual share would be costly and complicated.

When investing in index options, a buyer gains leverage since he can control more shares in an option that he could do if he bought the shares outright. It is possible to receive large percentage gains from relatively small changes in the underlying index as it is the direction of the price change that is important rather than its magnitude.

There is also a predetermined risk for the buyer when trading binary index options. By the nature of binary options, the buyer cannot lose more than the price of the option, so he will not need to find extra funds should his option expire out-of-the-money.

Index options are generally less volatile than stock options, since increases and decreases in stock prices will cancel each other out, making the index itself less volatile. However, indices can be affected by outside factors such as unemployment levels and political forces, making them an interesting asset choice.