Question

Which of the following statements is TRUE regarding stock index options?

A. The index is affected if a stock in the index should split
B. All index options use the European style of exercise
C. The shortest initial expiration is three months
D. An exercise is settled by cash instead of the delivery of securities

Answer 1

The true statement about stock index options is that they are settled by cash, not securities. Other options regarding index adjustments, style of exercise, and expiration lengths were also discussed for clarification.

Step-by-step explanation:

The statement that is TRUE regarding stock index options is: D. An exercise is settled by cash instead of the delivery of securities. Index options, such as those on the S&P 500, are typically cash-settled. This means when an option is exercised, the option holder receives the cash equivalent of the option's intrinsic value, rather than actual securities.

Let's address the other options for clarity:

• A. If a stock in the index should split, the index is usually adjusted to reflect this change, so it does not fundamentally affect the value of the index itself due to the market capitalization weighting of most indices.
• B. Not all index options use the European style of exercise; some index options are American-style and can be exercised at any time before expiration.
• C. Index options can have various expiration terms, including those shorter than three months, such as weekly or monthly expirations.