Getting started with index options

At their core, index options trades allow you to trade based on your opinion on the broader market: whether you’re bullish, bearish, expecting high volatility, or anticipating that an index will stay within a certain price range, there’s an options strategy that allows you to potentially profit from your opinion. In this article, we’ll coach you through some of the mental hurdles many first-time options traders face.

“I don’t know where to start.”

We’ll start with the two basic building blocks of all options trades: calls and puts. 

Calls

A call option is a contract that gives the option buyer the right, but not the obligation, to buy shares at a specified price (called the strike price) on or before a certain expiration date. In exchange for this right, the buyer pays a premium: the option’s price (typically) multiplied by 100, since a single contract typically represents 100 shares. 

Buying a call option is a bullish strategy, because as the price of the index goes up and above the strike, the right to buy becomes more valuable. For example, let’s say that the S&P 500 is trading at 6000 and a trader buys an SPX call option with a 6000 strike. On expiration, the S&P 500 closes at 6200. This trader will receive $20,000 deposited in their account [(6200-6000) x 100].

When you buy a call option, the max profit is theoretically unlimited, since there’s no limit to how high the index can rise. Your max loss is the premium you pay for the right to buy: the worst case scenario is that at expiration, the index closes below your strike and your option expires worthless.

However, if you sell a call option, you likely have a bearish stance: in exchange for selling a call, you collect a premium. Ideally, the call seller hopes that the price remains below the strike and the option expires worthless. For the call seller, the max profit is the amount of premium they collect from the buyer. Their max loss is theoretically unlimited, since the price of the underlying could hypothetically fall to zero. 

For a deeper dive into call options, check out How Call Options Work from the Options Institute, the OGs of options education.  

Puts

While calls are the right to buy, a put option gives the buyer the right to sell shares at a specified price by the expiration date. Put buyers have a bearish stance: as the index level falls below the strike, the right to sell becomes more valuable: your contract allows you to sell at a higher level than the current level of the index — sort of like selling a car above its blue book value. For the put buyer, their max profit is equal to the strike price minus the premium paid, and the lower the index falls, the higher the put buyer’s profit will be. If the index closes above the strike, their option will expire worthless, and the put buyer’s max loss is the amount of premium paid.

Just as with calls, each put contract has a buyer and a seller: the put seller collects a premium, and hopes for the price to stay above the strike price so the buyer’s contract expires worthless. The max profit for the put seller is the premium collected, and their  max loss, which is calculated by subtracting the premium from the strike price, is technically limited, but could be substantial.

We’ve just scratched the surface — to double-click into put options, check out How Put Options Work. 

“Options are complicated.”

Options don’t have to be complicated. “While they may seem complicated at first, many retail traders find index options more straightforward than expected,” says Alexandra Szakats, Vice President and Head of The Options Institute. “Plus, they offer flexibility and a unique way to express market views while managing risk. At The Options Institute, we’re committed to helping investors build their confidence and knowledge to use these products thoughtfully and strategically.”

In many ways index options can be simpler than stock and ETF options if you’re hoping to capitalize on your opinion of the market, since you don’t have to worry about early assignment or physical delivery of shares. 

If options seem complicated, the digestible, trader-friendly resources from Options Institute can help them become crystal clear to you.

“I’m not sure how to turn my opinion into an option trade.”

If knowledge is a trader’s most important tool, their most important commodity is time. Given the dozens of options strategies at your disposal, Cboe’s Trade Optimizer can help you identify potential options strategies: all you have to do is input the symbol you want to analyze, then select your sentiment or specific target price and expiration date. Based on your inputs, Trade Optimizer will show potential strategies with your maximum profit and loss. 

“Options are risky.” 

Yes, while it’s true that options aren’t without risk, different strategies allow you to define the maximum amount of risk you’re willing to take. 

It’s most important to understand your own risk tolerance, and if you choose to trade options, select a strategy with a level of risk that’s right for you. Many traders use options like protective puts to actually manage risk: Just as car insurance protects you from financial loss in the event of an accident, using options like protective puts can shield your portfolio from significant downturns, allowing you to trade with greater confidence and control.

The biggest risk of all? Assuming you’re not smart enough to give them a try. To gain further mastery of options, Cboe’s Options Institute has in-depth, interactive courses with knowledge checks to help you build your confidence before placing your first options trade.