An option whose underlying is a financial index, i.e., the entire performance of a specific index. This option gives the holder the right, without the obligation, to buy or sell, upon exercise, a standardized value of a specific stock index, for a specified price at a pre-determined future date. If exercised, index option is settled in cash, because physical delivery is not possible. Like stock options, index options allows investors to take a view on market movements or to hedge holdings in the underlying stocks.
American-style index options may be exercised before or at expiration. European-style index options may be exercised only within a specific period of time, generally on the last business day before expiration.
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