Index options are based on what measurement?

Index options are a type of financial derivative that derive their value from stock market indices, such as the S&P 500 or the Nasdaq 100. When an investor purchases an index option, they are essentially making a bet on the future direction of the underlying index. These options can be used for hedging, speculation, or to gain exposure to the stock market without having to own the individual stocks that comprise the index.

The premium of an index option is influenced by the price movement of the underlying index. If the index rises, call options on that index may increase in value, while put options may decrease. Conversely, if the index falls, put options may increase in value, and call options may decrease. This makes index options a popular tool for portfolio management and risk mitigation.

In contrast, other choices represent different underlying assets. Bond prices relate to fixed-income securities, commodities pertain to physical goods like oil or gold, and foreign exchange rates are concerned with currency values. None of these are the correct basis for index options, reinforcing that stock market indices are the fundamental measurement for this type of option.