Option trading is not actually restricted to individual stocks, as it is also capable of dealing with the giant commodity market which deals with a whole host of different commodities including cattle and grain. Additionally, there is another type of investment which works well with options trading, called index option trading.

 

What is an index? -- An index is basically just a listing of different stocks which have something in common, and it is used in order to represent the composite value for all of the stocks together. As an example, the Dow Jones Industrial Average is an index which represents the values of the top thirty largest and most popular stocks on the entire NYSE or New York Stock Exchange. Another index is called S&P 500 which stands for Standard and Poor's 500, which is another index which is in charge of representing 500 different stocks on the market. There are two extremely popular indices which are frequently used as a way to gauge the economy's progress as well as the general overall health of the stock market as a whole. Because they are familiar to most people, they make a great example because even people who have no interest in the stock market can recognize these names fairly easily.

 

But these two indexes are just two of a very large number of different indices. There are indices which are broad and used to reflect wide ranges of different stocks, and there are smaller indices that are specific for a certain group of stocks. The Dow Jones, for example, is in charge of tracking industrial stocks where as thirty six biotech research company stocks are being tracked by an index called the Morgan Stanley Biotech Index.

 

Indexes may also be classified based on how they are weighed, because some indices regard every stock on equal footing and the index price may be affected by any stock's price fluctuation no matter how large or small it's share within in the index may actually be. Other indices give each stock a weight based on the size of the company, so that smaller companies will not have quite as much of an impact on the index as a larger company would.

 

Index option trading tends to be popular because the risk is considered to be much lower than when dealing with individual stocks, because the index is far less likely to be subjected to the same types of adverse pressure which may cause a rapid decline in the value of an individual company but which will have a much smaller effect on a large body of several stocks. The index is generally much easier to work with when using trend analysis, which has created its popularity for many traders with mutual fund portfolios. Ethical indices are also worth looking into, as they list stocks which satisfy certain criteria in the operation of their business, such as the Wilderhill Clean Energy Index.