If you want to learn options trading, this book excerpt from Options Trading for Dummies by super trader George Fontanills, introduces you to indexes and options and how options trading works, when it comes to using indexes.
This is an excellent book to get the basics of how options trading works in the real world.
Knowing your risk as a trader means you really understand the market mechanics for the securities you use, as well as the different ways it can hit you with losses. Options present you with a unique challenge because they come with an expiration date – you need to know how to handle a security that eventually “goes away”. In this chapter, I focus on key points about indexes and index options that impact trading. I also address exercise style and assignment issues, as well as other things you need to be wary of going into expiration.
George Fontinanills has been teaching people how options trading works for years now, and was a great choice to author an options trading manual for the Dummies series.
Nailing down index options.
You can group most monthly listed stock options together when applying strategies or managing a position because their basic features match. For instance, the last trading date and exercise cutoff time for each are the same for all monthly stock options. Index options are slightly more challenging because those things can vary by contract. Here’s a primer on index and index options to help you avoid some unpleasant surprises.
Get to the nitty gritty of indexes.
An index is a tool that combines individual stocks, bonds, or commodities into one value so you can track the health of a particular market. This helps you target your trading on broad, diversified markets or narrower, focused ones.
The author continues on how options trading works, by talking about the specific indexes available for option trading here:
Taking a peak at popular indexes.
You’re probably familiar with indexes, by name at least. The refresher on this page shows you a few of the most popular indexes Wall Street has to offer and what they do:
S&P 500 (SPX): If you want to get a feel for the health of a diverse group of U.S. large-cap stocks, the S&P 500 Index (SPX) is the one to do just that. It is used by professional money managers and individual investors all over the globe to check the pulse of the U.S. stock market.
The Dow (Dow Jones Industrial Average): To gain insight on how 30 select manufacturers in the U.S. stock market are doing, use another widely followed index, the Dow.
Nasdaq-100 (NDX): If you like a faster pace, the Nasdaq-100 Index (NDX) is made up of the 100 largest, nonfinancial companies trading on the Nasdaq exchange. The index is made up of primarily with stocks in the technology industry and is most frequently used to measure this sector. It usually swings up and down more widely than the S&P 500 or the Dow.
If you want to know the reality of how options trading works, from real, and profitable trader, then check out this book at Amazon.