all right welcome everyone this is scott here again with a new video to help you learn how to trade invest and master your finances so you can apply that knowledge in the real world and multiply your money and in today's video here i wanted to discuss what index options are and how they are different from your normal standard equity options and so as i'm sure you could tell by the name index options are just options but instead of the underlying being shares of stock in this case the underlying are actual market indexes and so what you're seeing here is a one year price action chart of spx which is the s p 500 index right and in case you aren't aware indexes are simply a measurement tool of sorts that give you a gauge on the performance or the value of whichever assets the index is tied to so in the case of the s p 500 index here obviously this is tied to the top 500 stocks the top 500 companies in the us and so unlike stock indexes are not something that you can actually trade you can't trade shares of an index like you can trade shares of stock for an individual company so that's why index options are a bit different than your standard equity options and so before we really dive in here for those of you who are new to the channel i just want to let you know that i do also teach on skillshare where you can take my very in-depth classes on options trading and stock market investing and i provided some links to some of the introductory courses of mine in the description of this video below so be sure to check those out and when you sign up for skillshare using any of those links you'll get a two-week free trial all right so let's dive in here and we'll go to the trade tab now and take a look at the option chain on the s p 500 index and so as you can see right off the bat there are a variety of expiration cycles just like what you would see for the s p 500 etf and that would be spy so in the case of very common indexes like the s p 500 you're still going to have a variety of expiration cycles and the options in each of these expiration cycles are also going to be very heavily traded so liquidity is definitely not going to be a problem for some of these very common indexes and so for example if we go into the may expiration cycle here these are the standard monthly contracts you can see there are a whole lot of strikes for the s p 500 index here scroll back up to the at the money options there we go and like i said if you take a look at the open interest on each of these contracts both for the call options here and also for the put options as i was saying these are still very heavily traded contracts and because of the great liquidity the bid ask spreads are still very narrow right for example for the 4185 strike call option the bid price is 52.50 the asking price is 53.20 so the difference here the spread is only 70 cents that's very tight for an index whose value is in the thousands typically when you see options on a stock that trades for over a thousand dollars like amazon for example the spreads are usually much much wider than that but again because the s p 500 index is so heavily traded in so many different ways that's why there is still great liquidity and very tight bid ask spreads and so now you can trade these options just like you would trade options on any individual stock or any individual etf if i was bearish on the s p 500 i could just buy a put option or sell a call option or instead if i was bullish i could buy a call option or sell a put option i can do credit spreads i can do iron condors strangles whatever i want these are still options the first main difference though between index options and equity options is that index options here are cash settled meaning no shares of anything are ever exchanged when you are trading index options so for example if let's say i bought this 4185 strike call option which expires in 28 days from today on may 21st then let's say by the expiration date by may 21st the s p 500 index is above my strike price here maybe it goes to 4 000 and two hundred or something so in this case instead of being able to buy a hundred shares of something at a price of four thousand one hundred and eighty five dollars and then being able to turn around and sell those shares back into the market at the current market price of in this case 4200 and making a profit that way for index options i would simply get the cash profit as if i were to actually do that if there was some stock or some product on spx that i could actually buy and trade if i could actually buy 100 shares of that at my strike price and then sell those shares at the current market price and make a profit when i say index options are cash settled that means i just received the cash profits instantly as if i was actually able to trade shares of the s p 500 index so that buying and selling of shares is essentially totally skipped over now also because of that fact that also means that index options are european-styled options whereas most equity options are american-styled options and what this means is with european-styled options you cannot really exercise those options right if we go back to our example here where i bought the 4185 strike call option if before the expiration date the s p 500 had a massive rally and the index price blew through my call strike here i could not exercise my call option early and book those profits i could of course sell my call option and book my profits that way but that is the only way i could actually take profits early i do not have the ability to also take profits early by exercising the option before the expiration date and like i said this is very different from your standard equity options that are american-styled where in those cases you can early exercise your options right in those cases you can take shares or sell shares before the expiration date if you decide to do so but once again because there are no shares there is no actual asset that can be traded when it comes to indexes that's why you cannot actually really exercise them and lastly here there is one other major difference between index options and equity options so now i'm going to come over to the vix index type in vix this is an index that tracks the volatility of the s p 500 and i do also have a separate video explaining this it is very important and so i'll post a card above linking to it so you can watch it later and so now coming back to the trade tab for this index and obviously as you can see here there are a lot fewer expiration cycles which is one of the reasons i wanted to show you this index it's going to make this last main difference here a lot easier to see and first off you might notice these little am icons on each expiration cycle and what this means this am simply indicates that these options expire in the morning at the market open not in the afternoon when the market closes now not all expiration cycles for index options expire in the morning there can be a mix of some morning expirations and some afternoon expirations but this is obviously another big difference between index options and equity options because with equity options those options always expire in the afternoon at the market close moreover the actual expiration dates themselves are also non-standard or at least they can be non-standard for example this one here this may 19th expiration cycle this is a wednesday a wednesday morning and then if we look at the june expiration cycle on june 16th this is also a wednesday and so is july 21st so on and so forth and so this is also one final discrepancy between index options and equity options because for stocks and etfs standard expiration is always like i said in the afternoon and also on the third friday of every month at least for the monthly contracts and then weeklies also expire on fridays but obviously in the case of the vix index here these options both the monthlies and the weeklies expire on wednesdays and they also expire in the morning so that pretty much wraps it up for this video and in summary here index options are just options you can definitely trade them don't be afraid to just keep in mind that they are cash settled there is no underlying stock that you can trade after exercising the options they are also european styled options so you cannot exercise them until the expiration date and also they will often times have non-standard expirations sometimes they will expire in the morning and also not on fridays so just pay attention if you are trading index options what the actual expiration date is and of course also if the expiration is in the morning or in the afternoon and definitely also let me know your thoughts or if you've got questions in the comment section below and don't forget if you want to take some very in-depth classes on options trading and stock market investing then check out my skillshare courses links in the description of this video and finally if you enjoyed this video then please give it a thumbs up drop a comment and subscribe to my youtube channel i drop new videos every monday wednesday and friday and you don't want to miss out so thanks again for watching and i'll see you next time