Index Options

WHEN you invest in only one or two stocks, you are taking the chance that they might not go up when the market does. Most people cannot afford to buy a variety of stocks wide enough to fluctuate with the entire market. But now there is an investment designed to let investors profit from the rise or fall of the total market: index options.

Index options are like stock options. They give you the right to buy or sell securities at a predetermined price any time before the option expires. An option to buy is a call; the right to sell is a put.

When you buy such an option from a broker, you place a bet that some broad index of stocks will rise or fall, usually within the next 90 days. An index option usually costs only a few hundred dollars, but you could reap the same profits as if you had invested $15,000 to $20,000. That is because a small move up or down in the index can cause a much bigger change in the value of the option. This enormous leverage accounts for the thrills of index options trading. And the chills. Because if you wager wrongly you lose everything you had invested. That happened to many sad investors in the crash of October 1987.

The most popular index option is called the Standard & Poor's 100. It is a weighted average of the current market value of 100 blue chip stocks selected by the Chicago Board Options Exchange. Twelve other stock indexes are also used for options trading, including the New York Stock Exchange composite and the American Exchange's major market index.

If you are optimistic about the market, you buy a call option. It surges in value when the market goes up. If you are pessimistic, you buy a put option. It surges when the market goes down.

Remember, investing in stock index options is tempting but very chancy. One top brokerage officer recommends this strategy: First, determine how much capital you are willing to risk. Then, invest it all in super safe one year Treasury bills except for an amount equal to the interest that you will collect on your Treasuries. Next, place that amount into stock index options. Even if you lose it all, the interest you collect on your Treasuries will cover your losses.

You also can use puts to protect any profits you already have made on the stocks that you own but do not want to sell just now. If the market should fall, your stocks also would probably fall, but your put option would rise. That gain would offset at least part of the losses on your stocks.