[hedgehog]

I am very confused about how index options/futures work. They don't seem to have any tangible underlying asset like stocks, currency, Corn, wheat, etc.--just numbers on an index.

For example, what happens if I buy an S&P e-mini contract and let it expire? Do I don't get 5000 bushels of S&P stocks?
Or if I buy an index call option, could it be excercised? It's just all very confusing. Can anyone shed some light on the subject???

[daniel_asimov]

Welcome to the world of derivatives where money out of "nothing" can be made or lose...

I can't understand them at a 100% either... But it's fun... I got some books I'm reading about options. Even after reading.. I can't understand them at a 100%, going to take an options seminar in December... Wonder If by then will be easier to understand them.

Derivatives it's a whole new page... Takes time to understand them, not to mention.. trading them.

Sorry for not giving an explanation, Honestly speaking, I don't know much about how do they work.

-Daniel

[Jerry]

Hello Hedgehog..
dont know if its the answer you're looking for...but as a reformed index options trader from way back... I really dont think any index option trader ever has the intention of excercising any of the options....if the option goes "in" the money...then the option itself is worth more money.... and therefore...just the option gets sold at the end... you mentioned that if an option is allowed to expire....then what happens....?? all options at or out of the money expire worthless...therefore..no reason for any excercise...Jerry...

[David Waring]

Originally Posted by hedgehog

I am very confused about how index options/futures work. They don't seem to have any tangible underlying asset like stocks, currency, Corn, wheat, etc.--just numbers on an index.

For example, what happens if I buy an S&P e-mini contract and let it expire? Do I don't get 5000 bushels of S&P stocks?
Or if I buy an index call option, could it be excercised? It's just all very confusing. Can anyone shed some light on the subject???

Hey Hedgehog,

Glad to hear from you.

You are correct that the underlying instrument in an S&P Futures contract or S&P Options contract is not tangible like it is with a commodity. If you think about it however outside of commodities and currencies, none of the underlyings are tangible.

Take a stock or bond for instance. While you technically can get and hold pieces of paper that represent the value of your stock (stock certificates) what you are really trading when you are trading stocks is an ownership share in a company which cannot really be touched. Some goes for bonds, what you are really trading is ownership of a flow of interest payments from the bond issuer not the piece of paper.

So, long story short, what you get if you exercise an option on the S&P would be the cash value of the index, which is the index value multiplied by $100.

Hope that helps. If there are any other questions or comments on this one please feel free to post as always.

Best Regards,
Dave