Series 7: 5.5.1.1. Characteristics

5.5.1.1. Characteristics

Contract multiplier. Contracts for an index option are similar to a stock option, but contracts are not sized by the value of 100 shares of stock. Instead, an index options contract uses a contract multiplier of $100 to compute its size.

For example, suppose you hold a contract of the DJX April 281 call @ 3.50. This is a Dow Jones Industrial Average index option whose value is pegged to 1/100th of the DJIA, meaning that 281 corresponds to a DJIA of 28,100. The option expires in April. You pay a $350 premium (3.50 x $100 contract multiplier). You decide to exercise the contract on a day when DJIA closes at 28,500. The option pays $400 ((285 – 281) x $100 contract multiplier). After subtracting out the $350 you paid in premiums, you are left with a net profit of $50.

Cash settlement