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S&P 500, S&P 100, NASDAQ 100, or the oil index. Obviously such options don’t have single stocks as their underlying shares but a collection of stocks (or products) making up the underlying indices, some of which may also have their own index-following stocks such as S&P 500 (symbol: SPX) or NASDAQ 100 (symbol: QQQ). Index options are traded the same way as stock options, just like index stocks are traded the same way as corporate stocks. The difference is that the underlying product in index options is in actuality an index.

Some index options expire on the third Thursday of the month rather than the third Friday, they are cash-settled (unlike other options where the underlying shares may be assigned or put at expiration), and trading them in certain ways (such as spreads) may require higher funds available in your account from brokers than trading stock options. Also, as you can imagine with index options, there is no such thing as writing covered calls. All index option call writings are by definition naked calls subject to broker requirements for writing naked calls, although index covered call writing can be simulated if the underlying index has an index-following stock (e.g., QQQ) and the call writer holds a corresponding number of shares relative to the number of contracts written.

LEAPS

Options are a relatively new form of security. But even a newer form of options is LEAPS, which came into the scene in 1990. LEAPS stands for Long-term Equity AnticiPation Securities. Most options, including the ones we used in our examples, are relatively short-term, having expiration dates from one to nine months from the current month. As we move from one month to the next, the options for the current month expire and new options with the expiration month set for nine months later are issued. For example, if it is currently early January, …