Insurance master

Stock market indices are well known, not only in the investment community but also among many individuals who are not even directly investing in the market. Because a stock index is just an artificial portfolio of stocks, it is reasonable to expect that one could create an option on a stock index. Indeed, we have already covered forward and futures contracts on stock indices; options are no more difficult in structure.
For example, consider options on the S&P 500 Index, which trade on the Chicago Board Options Exchange and have a designated index contract multiplier of 250. On 13 June of a given year, the S&P 500 closed at 1241.60. A call option with an exercise price of $1,250 expiring on 20 July was selling for $28. The option is European style and settles in cash. The underlying, the S&P 500, is treated as though it were a share of stock worth $1,241.60, which can be bought, using the call option, for $1,250 on 20 July. At expiration, if the option is in-the-money, the buyer exercises it and the writer pays the buyer the $250 contract multiplier times the difference between the index value at expiration and $1,250.
In the United States, there are also options on the Dow Jones Industrial Average, the Nasdaq, and various other indices. There are nearly always options on the best-known stock indices in most countries.