One important difference between stocks and options is that stocks give you a small piece of ownership in a company, while options are just contracts that give you the right to buy or sell the stock at a specific price by a specific date
An option is a contract to buy or sell a specific financial product officially known as the underlying instrument or underlying interest. With an index option, the underlying interest is a market index. In an equity option, the underlying instrument is a stock, exchange-traded fund (ETF), or similar product.
This contract establishes a specific price, called the strike price, at which the contract may be exercised, or acted on. It has an expiration date, and once it expires, the option no longer has any value and no longer exists
Options come in two varieties: calls and puts, and you can buy or sell either type. You make those choices -whether to buy or sell and whether to choose a call or a put – based on what you want to achieve as an options investor.
Index options offer the investor a chance either to benefit from an expected market move or to protect holdings in the primary instruments. The difference here is that the underlying instruments are indexes. Index options enable investors to gain exposure to the market as a whole, or to specific segments of the market, with one trading decision and frequently with one operation
An index option buyer cannot lose more than the price of the option, the premium. Index options can provide leverage. An index option buyer can pay a small premium for a market exposure in relation to the contract value.