Author : , Date : 27 September, 2016

Trading with Index Options

What are stock indices?

An interesting asset category on the binary options market is the stock indices. A stock index is a combination of stocks that represent a sub-segment of the market. It is calculated from the prices of the component stocks. An index acts as an asset itself, it can be traded, it has a price that changes as stock prices change.

The most popular stock indices

Options traders usually focus on the stock exchanges of the most developed economies of the world, such as the United States, for example. The USA has several stock indices, so it offers investors a wide range of choice.

The major American indices include the S&P 500, the Dow Jones and the NASDAQ.

• S&P 500 is based on stocks of the top 500 publicly traded American companies, therefore it is regarded as a good indicator of the overall state of the country’s economy.
• The Dow Jones Industrial Average is a price-weighted average of the 30 most significant stocks traded on the New York Stock Exchange. This index was created by Charles Dow in 1896, so it one of the oldest stock indices in the world. The “Dow” contains companies such as General Electric, Exxon Mobil and Microsoft.
• NASDAQ is a composite of stocks of top 100 companies in the technology and pharmaceutical sectors. It includes stocks of foreign companies as well, therefore its price movement depends on several factors, not only on the economy of the United States.

The American stock exchanges are the last exchanges to open during the day, they start trading after the Asian and European exchanges. By that time, traders have some experience on the pulse of the market.

What to watch when trading US index options?

Trading with index options involves making a prediction whether the prices of the stocks included will rise or fall. It is important for binary traders to understand what factors influence stock prices. This will help in determining the direction of the trades.

If you decide to trade US index binary options, you need to focus on the following economic data of the United States:

1) Manufacturing data
2) Employment data, especially Non-Farm Payrolls
3) Gross Domestic Product.
4) Consumer sentiment.
5) Housing data
6) Credit rating.

These factors affect the decisions of investors whether they want hold their stocks or to sell them. As the index is the derivative of the stocks, these decisions affect the movement of the index as well.

Time to trade with stock indices

The next few months might be suitable for trading stock indices, as stock prices tend to rise at the turn of the year. The reason for this is that stock funds try to improve their year-end results by pushing stock prices higher. So seasonality can be considered as a useful forecasting instrument in case of trading options on stock indices as well.

Traders certainly need to analyze the market carefully before placing call options, as the market can surprise them any time. The presidential elections and the potential interest rate rise in the US can eventually push stock prices down.

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