8.5 Index and Non-Equity Options

Series 7 General Securities Representative

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1 Introduction

About the Series 7 How to Use This Guide

2 Chapter 1: Equity Securities

1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities

3 Chapter 2: Debt Securities

2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks

4 Chapter 3: U.S. Government & Agency Securities

3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments

5 Chapter 4: Municipal Securities

4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules

6 Chapter 5: Investment Companies

5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation

7 Chapter 6: Variable Products & Annuities

6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance

8 Chapter 7: Alternative Investments & DPPs

7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives

9 Chapter 8: Options

8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements

10 Chapter 9: Customer Accounts

9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts

11 Chapter 10: Retirement & Education Plans

10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation

12 Chapter 11: Securities Markets & Trading

11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants

13 Chapter 12: Rules, Regulations & Ethics

12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct

8.5 Index and Non-Equity Options

Key Takeaways Explain This Topic AI

Index options are cash-settled and most are European-style (exercise at expiration only).

The index multiplier is $100 per point, just like the equity 100-share multiplier.

Index options hedge diversified portfolios without selling individual holdings.

LEAPS are long-dated options listed up to about 39 months (roughly three years).

Yield-based interest-rate options move directly with interest rates, not inversely.

Last updated: June 2026

Index Options

Beyond single-stock options, the Series 7 covers options on broad market indices . The most-tested are the S&P 500 (SPX) , the Dow Jones Industrial Average (DJX) , the Nasdaq-100 (NDX) , and the CBOE Volatility Index (VIX) , often called the "fear gauge."

How index options differ from equity options

• Feature Equity options Index options
• Settlement Physical delivery of 100 shares Cash settlement
• Exercise style American (anytime) European (at expiration only)*
• Multiplier 100 shares $100 per index point
• Typical use Single-stock speculation/hedge Diversified portfolio hedge

*The OEX (S&P 100) is a notable American-style index option.

Cash settlement

When an index option is exercised, no securities change hands . The holder receives the intrinsic value in cash , based on the closing index level.

Example: An investor holds an SPX 5,000 call and the index closes at 5,050.

• Intrinsic value = 5,050 − 5,000 = 50 points
• Cash received = 50 x $100 = $5,000

Exam alert: Because index options are cash-settled and usually European-style, a writer cannot be assigned early and never has to deliver or receive actual stock — a frequent comparison point against early assignment risk on American equity options.

Hedging a Portfolio with Index Options

An investor who owns a diversified, market-correlated portfolio can buy index puts to insure against a broad decline without liquidating individual positions and triggering taxes or transaction costs.

If a $500,000 portfolio has a beta of 1.0 versus the S&P 500, the investor buys enough SPX puts so that the notional value (index level x $100 x number of contracts) approximates the portfolio's value. Higher beta means more contracts are needed; lower beta means fewer. This is the index-level equivalent of the protective put from Section 8.3.

LEAPS

LEAPS (Long-Term Equity Anticipation Securities) are simply long-dated options, available on both individual stocks and indices. They are listed for terms up to about 39 months (commonly described as roughly three years ) and always carry a January expiration.

• Feature Standard options LEAPS
• Term Up to ~9 months Up to ~39 months (~3 years)
• Time value Moderate Higher (more time)
• Premium Lower Higher
• Liquidity Higher Lower

Use case: LEAPS give long-term leverage or long-term portfolio insurance without the constant rolling that short-dated options require. The trade-off is a larger premium outlay and thinner trading volume.

Foreign Currency Options

Currency options grant the right to buy or sell a foreign currency at a set exchange rate. Note that the U.S. dollar itself is not optionable; investors trade options on foreign currencies (euro, yen, pound, etc.).

Contract size: varies by currency.

Settlement: generally cash or physical depending on the contract.

Use: an importer/exporter hedges currency risk; speculators bet on exchange-rate moves.

Example: A U.S. company expecting to receive €100,000 in three months fears the euro will fall. It buys euro puts (the right to sell euros at a fixed rate), locking in a minimum dollar value. A company that must pay in euros would instead buy euro calls .

Interest-Rate Options

These come in two flavors, and the exam tests how each reacts to rate changes:

Price-based (debt) options track a bond's price , which moves inversely to rates.

Yield-based options track the yield itself, which moves directly with rates.

• Interest rates Bond prices Yield-based calls Yield-based puts
• Rising Falling Gain (yields up) Lose
• Falling Rising Lose Gain (yields down)

Exam tip: The classic trap reverses the price/yield relationship. A yield-based call gains when rates rise ; a price-based call on a bond gains when rates fall (because the bond's price rises). Identify whether the option references price or yield before answering.

Non-Equity Options at a Glance

• Type Underlying Settlement Primary use
• Index option Stock index level Cash, $100/point Hedge a diversified portfolio
• LEAPS Stock or index Like its base type Long-term leverage or insurance
• Currency option Foreign currency Cash or physical Hedge FX exposure / speculate
• Yield-based Treasury yield Cash, $100 multiplier Bet on or hedge rate direction
• Putting It Together

Non-equity options extend the same right-versus-obligation framework to broader exposures. An institution hedging a stock portfolio reaches for index puts ; an exporter hedging foreign receivables reaches for currency puts ; a bond manager fearing a rate spike reaches for a yield-based call or a price-based put. The multiplier remains $100 for both equity and index contracts, so dollar calculations carry over directly from Sections 8.1 and 8.2.

Common trap: Remember that index options are usually European-style and cash-settled , so the writer faces no early assignment and never delivers shares — a frequent point of contrast with American-style equity options that can be assigned at any time.