In Index options trading the underlying asset is an Index(Nifty, Bank Nifty, etc). Index option is a security that allows the owner to buy or sell underlying assets at specified price by a specified date.
- There is an underlying index.
- Expiration date
- Strike price
- Right to buy/sell underlying Index.
Advantages to trade in index option
Diversification: Index Option is a compilation of many individual stocks. In index Option, trading traders can construct strategies to bet on the entire market rather than the performance of one individual stock.
Predictability: Index option is not easy to predict but it is less volatile than individual stocks. The index will show lower fluctuations as compared to individual stocks.
Liquidity: Index option is very popular among options traders, investment firms, these drives up the volume available and always have a fair price to trade.