Buying Index Calls and Puts
If you want to profit from an upward or downward movement in the broad market or a particular industry sector you might consider buying index Options.
Choice of Index
Calls and puts on indexes are listed on the various U.S. options exchanges. These options can be based on indexes on the broad market, on specific industry sectors such as technology, oil, pharmaceuticals, or retail issues, and on overseas markets.
Exercise and Assignments
Exercise and assignment for puts and calls on indexes work differently than for puts and calls on stocks. Instead of exchanging shares at exercise, index options are cash-settled, which means you, as the holder, receive cash when you exercise an in-the-money option. The amount of cash settlement is generally based on the difference between the strike price of the option and the exercise settlement value of the underlying index, or the amount it is in-the-money, multiplied by $100.
A matter of style
You should also note that index options can be American-style or European-style. American-style options can be exercised at any time up until their expiration date. European-style options can be exercised only during a specified time just prior to expiration. If you purchase an index option, you should find out its expiration style, since that will have a major effect on your exercise strategy.