SIE: 4.1.1.6.6. Index Options

4.1.1.6.6.  Index Options

Rather than base an option on a single underlying stock, investors may choose to invest in an option on an index of stocks or other securities. Index funds can be broad-based, for example, tracking the S&P 500, or narrow-based, reflecting the performance of a particular segment of the market, such as health care or energy.

Index options may be used to hedge against market risk. If an investor has a portfolio of equities and wants to hedge against a stock market decline, he can buy a put on the S&P 500 index. If the