An index option is a financial derivative based on a stock market index. It provides the holder with the right, but not the obligation, to buy or sell the underlying index at a specified price (strike price) before or at the option's expiration date.
Index options function similarly to stock options but are based on a market index rather than individual stocks. There are two types of index options: call options and put options.
Call Option: Gives the holder the right to buy the index at the strike price.
Put Option: Gives the holder the right to sell the index at the strike price.
If the option is exercised, the settlement is made in cash, reflecting the difference between the index's current level and the strike price. For example, if a call option's strike price is lower than the index level at expiration, the holder profits from the difference.
Consider an investor who purchases a call option on the S&P 500 Index with a strike price of 3,000. If the S&P 500 is at 3,100 at expiration, the investor can exercise the option, receiving the difference (100 points) multiplied by the contract's multiplier (usually ₹100 per point for major indices). This results in a profit of ₹10,000 (100 points x ₹100).
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