DOW JONES is the oldest (established in 1896) continuing U.S. market index and the world's best-known stock index to investors. Historically, the U.S. economy was mainly driven by industrial companies such as General Electric (G.E.). But nowadays, services and technology serve as the economic backbone.
Compared to buying $Spdr Dow Jones Industrial Average Etf, the $Dow Jones 1/100 Indu Index options also provide an alternative way to trading the Dow Jones.
As a broad market index, the Dow Jones Industrial Average, Dow Jones, or simply the Dow, is an index that gives an overall view of the stock markets. It measures the price performance of a basket of 30 large-cap, dividend-paying stocks. Here's a look at 5-year returns of the DJI, S&P500, and NASDAQ Composite Index with an end date of August 05, 2022, by applying the Compare Tool on the Webull App.
Investors can gain exposure to the Dow by buying composite stocks included in the index. Moreover, purchasing an exchange-traded fund that tracks DJI's performance provides investors with a one-stop-shopping approach, such as $Spdr Dow Jones Industrial Average Etf.
There are also option contracts on the underlying index. Here, we introduce the DJX index option contracts tradable on Webull. But, it’s necessary to point out that options are leveraged instruments, which adds a level of risk—options tend to be more complex than simply owning stocks or ETFs. Investors should not start options trading without a moderate understanding of the risks and rewards.
The DJX index option contract is based on 1/100th (one-one-hundredth) of the current value of the Dow Jones. So, for example, when DJI is at 32,803, the DJX level will be 328.03. The DJX index option trades under the symbol of DJX and has a contract multiplier of $100. For index options trading on Webull, there are five strategies supported:
To profit from a price rise/drop in the index with a bullish/bearish outlook:
To earn a return on the cash deposit with a moderately bullish outlook:
To earn a return on the cash deposit with a moderately bullish outlook:
DJX index options are options on the actual index value, so they're a bit different from traditional options on ETF. These differences can help investors better understand index options.
Trading volume helps investors understand the liquidity of an options contract. Compared to the DJA ETF option, one clear drawback of DJX index options is the lower volume statistics.
Suppose an option has a higher trading volume. In that case, there are a large number of contracts actively changing hands. This makes it easier for an investor to open or close a position and obtain a favorable price.
Therefore, the lower liquidity in trading DJX index options may incur a higher implicit transaction cost.
Index options are "cash settled" against a final settlement value for the index. Cash is delivered instead of the asset to execute and finalize an index option contract. The cash settlement makes it easier to manage options positions. For example, someone with a call option doesn't have to worry about making payment, taking delivery, and then deciding to keep or sell the stock.
Most equity/ETF options are American style, meaning they can be exercised at any point before expiration. European style option contracts, by contrast, can only be exercised on the expiration date. Index options are exercised in the European style.
But what does this difference mean for investors? Other things being equal, the American style option can be priced at a higher premium than the European style. This is because sellers take on more risk by not knowing when a buyer might decide to exercise their contract.
Most investments are subject to taxes, including options trading. However, special tax treatment provisions apply for index option trading.
Profits on exercising equity/ETF options are taxed 100% at the short-term capital gains rate. Index options benefit from a more favorable tax treatment:
● 40% of any gain (or loss) is taxed at the short-term rate; and
● 60% is taxed at the appropriate long-term rate.
This 60/40 setup is applicable even if investors hold index options for less than one year. Therefore, the 60/40 tax treatment provides potentially lower tax liability for a short-term strategy of options trading.