Stock and index options
Stock market index option is a type of option, which is a financial derivative. Index options may
be tied to the price of either broad-based indexes like the S&P 500 Index or the Russell 3000
Index or to narrow-based indexes, which is an index that is limited to a particular industry like
the mining industry or the semiconductor industry. Popular stock index options include the
eS&P 500® (SPXSM) Index , the S&P Dow Jones Indexes (OEX® and DJX), the Russell 2000® (RUT)
Index, and the NASDAQ-100® (NDX) Index.
Stock option contracts are traded either on a public stock exchange (also known as ETO's
(Exchange Traded Options)) or implicitly traded between two parties (also known as OTC's
(Over The Counter options)). The majority of options are traded through the former. Options
are listed and standardized by the stock exchange and are traded by what is known as Serial
Months.
All stock options expire on a certain date, called the expiration date. For normal listed options,
this can be up to nine months from the date the options are first listed for trading. Longer-term
option contracts, called LEAPS, are also available on many stocks, and these can have expiration
dates up to three years from the listing date.
News - Trading Microsoft Options -- Buy This Put Before the Stock Moves Lower
Stock prices tend to move strongly in the wake of earnings surprises, often more strongly than
justified. Microsoft appears to be a good example. A volume spike was seen on the day of
earnings, the biggest spike during the last six months. At the same time, momentum as
measured by the relative strength index moved up to 81.98, far above the "overbought" index
level of 70. This was the first time momentum showed an overbought reading since early May.
The stock's price further confirmed the overbought condition in two ways. First, price gapped
above resistance by four points. Second, it formed a very bearish inverted hammer signal on
Friday.
All of this points to a likely reversal in the immediate future. With this in mind, we focused on
the weekly options expiring this Friday. The Oct. 30 weekly 53.4 put option closed Friday with
an ask of 0.79. Adding $9 for trading fees, this option can be purchased for a total of about $88.
The evidence is compelling for a correction to occur before Friday, so for such a low cost this
could be an appealing swing trade based on the positive earnings surprise.
