A number of factors can affect an option price. The most important ones are:
The index price.
The volatility of the index.
The expiration date of the option.
Trading In Stock Index Options
Like stocks, stock index options are bought and sold through brokers.
When an investor wants to perform an options transaction, he must provide his broker four pieces of information:
The type of transaction: buying or selling.
The name of the stock index option.
The number of options.
The price limits.
An investor can place a purchase (or sale) order with multiple price limits. For example, if he wants to buy 10 options he can issue the following instructions: Let’s say we buy 5 options at under $1,000, 3 options at under $1,200 and 2 options at under $1,300.
If the option price is $950, then the broker will buy 10 options (2+3+5).
If the option price is $1,150, then the broker will buy five options (2+3).
If the option price is $1,250, then the broker will buy two options.
If the option price is $1,350, then the broker will not buy any options.
As stated above, an option writer’s potential loss is unlimited. Stock Index Options writers are therefore usually large institutions, and not private individuals.