Trading Index Options

Trading Index Options

As well as selecting individual company stocks when trading binary options, you can try trading index options by focusing on a major stock exchange. That form of trading index options means predicting whether the value of a complete index, such as the NASDAQ or the FTSE, will have risen or fallen by a specified time. If you have any interest in shares, index options trading provides an alternative way of making money quickly.

When trading binary options, the value of each market index is determined as the sum of the value of share prices of the individual companies that are quoted on it. The Dow Jones Industrial Index includes the thirty most traded stocks on the New York Stock Exchange while the S&P 500 is made up of the 500 biggest corporations in the US and the NASDAQ Composite Index comprises more than 3,000 securities. As a result, the value of each index is changing constantly and so they provide ideal opportunities to profit from index options trading.

Most of the exchanges are open from 9 am until 4 pm. Monday to Friday, so you can practice trading index options at a convenient time. Additionally, the NASDAQ 100 Future is trading 24 hours a day and various global exchanges are open at different times, meaning index options trading is available at most times.

Factors influencing index options

Markets are influenced by a lot of factors that include a country’s trading performance, global events and the overall state of the world economy. They are often driven by sentiment, with the fear factor sometimes being the only reason that markets are forced lower. The resulting up and down movements are ideal when trading index options since they give multiple profit opportunities. Sometimes markets settle into bull or bear trends that last for long periods, making forecasts easier for index options trading. Volatile markets give more opportunity while settled trends provide more certainty, which either way has attractions for index options trading.

The Dow Theory is an established and useful basis for trading index options. One of its principles is that a bull market has three phases – accumulation, when knowledgeable traders buy against market sentiment, participation when the price increases rapidly as others buy, and distribution when the knowledgeable investors sell. For index options trading, this simply means that you’ll profit by recognizing when prices are due to rise or fall, and trade accordingly.

Trading an index in the conventional way would mean buying shares in every company that makes up the index. This would be a very expensive and risky business, especially with some of the larger indices. When trading index options, however, you’re only placing a small stake on a forecast of the direction in which the index will move. This is an altogether more affordable and less risky method, making index options trading a more practical proposition.