Index options and stock options are quite similar, but there are quite notable differences. For instance, with an index option, traders know for a fact whether the position is long or short the market. On the other hand, traders utilizing stock (or equity) options are not dependent on a full market outlook and are instead focused on predicting the direction of a specific underlying stock or equity.

It is common to confuse the index options and stock options and to assume all options are the same, especially for those newer to trading options. After all, it isn't possible to just trade the S&P 500 Index (SPX) on the market; and the SPX is an index. What exactly is an index, then? An index is a calculation using the weightings of various component groupings like the S&P 500 or the Nasdaq-100 (NDX). Additionally, pricing is automatically calculated based on the changes in price for the components of the index. When trading indexes, it's important to remember that you are trading options, not shares of the index!

Understanding How Options Contracts Work and Options Trading Essentials

First, what exactly is an option? An option is a contract between two entities, a buyer and seller, that guarantees the product will be delivered at the date of expiration. The delivery is typically related to the value of the underlying asset or component, like equities or indexes.

Understanding How Indexes Relate to the Stock Market

Here are few popular indexes that its critical, as a trader, to be familiar with:

• $SPX – S&P 500 Index
• $OEX – S&P 100 index
• $VIX – Cboe Volatility Index
• $XEO – S&P 100 (European) Index
• $RUT – Russell 2000 Index
• $DJX – Dow Jones Industrial Average 1/100 Index
• $NDX – NASDAQ 100 Index

There are other index options trading on U.S. stock exchanges, but these are rare. Remember that you most likely need to add the "$" ahead of typing in the index symbol when looking these indexes up on a brokerage site.

If you are ready to begin capitalizing on the power of index options, check out Schaeffer's Wealthbuilder for trades on the S&P 100 Index (OEX), the Nasdaq 100 Trust (QQQQ)m and the Russell 2000 Index (IWM). Trades from this service are guaranteed to deliver you an 80% win rate or you will receive your full subscription fee back at the end of 12 months.

Quick Overview: Index Options vs. Stock Options

There are two main components that make an option: the option premium and the strike price. The option premium is the fee paid to purchase the option. With stock/equity options, the strike price is determined by the options seller. If you buy a call option, a specific strike price is offered to you. In contrast, with index options, the strike price is not set by a specific seller and the index option strike price varies based on where the specified stock market trades at the point of purchase.

As most know, there are two types of option: calls and puts. Traders can either buy or sell calls and puts on most major exchanges and brokerage platforms based on his or her trading goals.

Stock/equity options are contracts purchased by traders based on the underlying equity and, when purchased, the options trader either buys or sells the option at a given strike price with an expiration date. After the option(s) expire, the trade is completely closed.

Index options are intended to give traders a chance to benefit from a market move and can also protect a trader's portfolio holdings. The most significant difference between equity options and index options lies in the component where the options derive value in an index. Index options enable options traders to buy and sell based on broader market performance or specific sector performance. Index options provide traders with an opportunity to pay a small premium compared to the actual contract price.

How does Cash Settlement Differ Between Index Options and Stock Options?

Another critical difference between stock options and index options lies in the settlement process

Let's start with an example of a stock option. One call option for DIS is about to expire in-the-money. If the trader had not previously sold the stock option prior to the close of the market on the expiration date, 100 shares of DIS are added to his trading account at the strike price.

On the other hand, here is an example of an index option. One call option for SPX is about to expire in-the-money. In this situation, the trader would receive the intrinsic value of the position. If the trader had not previously sold the index option prior to the close of the market on the expiration date, a deposit equivalent to the the intrinsic value of the index option would be made in his trading account.

Are the Settlement Rules Different for Index Options and Stock Options?

The topic of settlement rules can be pretty dull. However, understanding these rules and differences related to the buying and selling of index and stock/equity options is important nonetheless. Traders can end up in trouble with headaches and losses without this necessary information.

Index options can settle based on regular options and weekly option. Regular options are more like a standard stock, with a variety of differences in the weekly options. An index typically settles on Thursday at the market close, based on the first trade being made on Friday. Stock options settle on the third Friday of each month, with the exception of weekly stock options that expire every Friday except the third Friday of each month.

A Simple Comparison of Index Options and Stock Options

 Pros:

• Index options offer access to a market with more liquidity.
• Stock options provide you thousands of options with various prices
• Index options offer cash settlements.
• Stock options offer inexpensive price options.

Cons:

• Index options only offer a few choices that are relatively higher priced.
• Index options require more capital in your account.

Summary

For traders, index options and stock options are both essential tools for successful trading and capitalization of your trading portfolio. Index options are utilized for speculation and hedging positions in a liquid, tax-preferential market. Stock options are utilized when traders look to inexpensively purchase a bundle, typically 100 shares, on an equity. While no options are suitable for every trader, both index options and stock options provide extensive trading opportunities to traders of all levels of experience.

Software stock Zscaler Inc (NASDAQ:ZS) has been barreling up the charts since mid-May, when it hit an annual low of $157.03. In fact, the security added a solid 42.8% over the past three months, with consistent support at its 20-day moving average, while long term support at the 140-day moving average has helped contain most of ZS’ pullback for nearly two years. Plus, Zscaler stock just touched a record high of $249.71 late last week, and remains within a chip shot of that peak.

In addition to a promising technical setup on the charts, another bullish signal just started flashing for ZS that indicates this rally isn’t over just yet. Specifically, Zscaler stock just landed on Schaeffer’s Senior Quantitative Analyst Rocky White’s list of stocks trading near a 52-week high amid historically low implied volatility (IV). This has been a bullish combination for the equity in the past, with ZS boasting higher one-month returns after 83% of the six signals seen in the past five years. The stock averaged a 7.2% pop in this time period, and a similar move from its current perch would easily put it at a fresh record peak, just above the $261 level.

The security recently notched a bull note, just one day after reaching its aforementioned record peak, with BTIG lifting its price target to $279 from $253. There’s still room for a shift in sentiment to send the stock higher, though. Of the 21 in coverage, six still say “hold.” Plus, the equity’s 12-month consensus price target of $246 is a slim 1.5% premium to current levels.

A further unwinding of short interest could put wind at Zscaler stock’s back, too. While short interest dropped 1.7% in the most recent reporting period, the 6.52 million shares sold short make up a healthy 8.5% of the stock’s available float, leaving plenty of room for a short squeeze.

An unravelling of pessimism is overdue elsewhere. Namely in the options pits, where Zscaler stock sports a Schaeffer's put/call open interest ratio (SOIR) of 1.27, which stands higher than 79% of readings from the past 12 months. This implies short-term options traders have rarely been more put-biased. Echoing this, Zscaler stock’s 10-day put/call volume ratio of 1.25 sits above 95% of annual readings at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), suggesting long puts have rarely been more popular.

As we stated before, ZS’ Schaeffer's Volatility Index (SVI) is incredibly low right now, sitting in the 3^rd percentile of its 12-month range, making now a perfect time to speculate on the security’s next move higher with options, since these traders are pricing in extremely low volatility expectations. Additionally, the stock’s Schaeffer’s Volatility Scorecard (SVS) ranks at 79 out of a possible 100. This means Zscaler stock has tended to outperform said volatility expectations – a good thing for buyers. 

App-based stock-buying platform Robinhood Markets Inc. (NASDAQ:HOOD) made its public trading debut on Thursday, July 29. The initial public offering (IPO) price came in at $38, and per the Wall Street Journal, more than 300,000 users of the trading app bought shares at IPO, or around 1.3% of the company's funded account base. So far, only two analysts have initiated coverage on the security, both with a "buy" rating.

On its first day of trading, HOOD climbed as high as $40.25, and by its fifth session hit a top of $85 -- more than double its IPO price. However, on Thursday, Aug. 5, Robinhood stock landed on the Short Sale Restricted (SSR) list, plummeting more than 27% after the company announced its existing shareholders (consisting of mostly venture capital firms) will sell up to 97.9 million shares. In the amended filing it was specified Robinhood will not receive any proceeds from the sale of its common stock.

In the table above, Schaeffer’s Senior Market Strategist Chris Prybal broke down HOOD’s market cap value compared to different levels in its share price, based off an outstanding 835,680,000 shares. The leap in market value from Robinhood stock at $30 versus $85 is drastic -- $25 billion to $71 billion, respectively. As of mid-Thursday, HOOD stood at a market cap of $51.15 billion, with the shares just shy of $62 in afternoon trading.

In terms of HOOD options, they began trading on Wednesday, Aug. 4. Not only were traders diving head first toward the equity, but options volume surged near 330,000 contracts in the session -- coming in only second to Facebook (FB). Per Trade-Alert, "Robinhood options were the 14th most-active single stock class, with puts leading calls 170k to 160k and a total of $320M of premium changing hands."

Digging even deeper into market cap analyses, because Robinhood as a company presents as an app that allows consumers to trade and manage their stock market portfolios virtually, it spreads the equity into multiple sectors: software and capital markets. Below, the tables show where Robinhood stands among its peers, and surprisingly, it’s already made quite the name for itself. Even at its current value, it ranks among the top 10 of both sectors. What’s most eye-catching about the capital market list is that Robinhood is already sitting at almost half of Goldman Sachs’ (GS) market cap -- a company that was founded in 1869 and has 60 times the revenue of HOOD.

Subscribers to Schaeffer's Chart of the Week received this commentary on Sunday, August 8.

Today picks up with the National Federation of Independent Business' (NFIB) small-business index, as well as preliminary productivity, and unit labor costs data.

The following companies are slated to release quarterly earnings today, August 10:

Aramark (NYSE:ARMK -- $34.89) provides food, facilities, and uniform services to education, healthcare, business and industry, sports, leisure, and corrections clients in the United States and internationally. Aramark will report its Q3 earnings of 2021 before the bell today.

Bentley Systems Inc. (NASDAQ:BSY -- $64.90) provides infrastructure engineering software solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. Bentley Systems will report its Q2 earnings of 2021 before the bell today.

Casper Sleep Inc. (NYSE:CSPR -- $6.92) designs and sells sleep products to consumers in the United States, Canada, and Europe. Casper Sleep will report its Q2 earnings of 2021 before the bell today.

ChipMOS TECHNOLOGIES Inc. (NASDAQ:IMOS -- $39.57) researches, develops, manufactures, and sells high-integration and high-precision integrated circuits, and related assembly and testing services in Taiwan, Japan, Singapore, and internationally. ChipMOS will report its Q2 earnings of 2021 before the bell today.

Dream Finders Homes Inc. (NASDAQ:DFH -- $24.41) operates as a holding company for Dream Finders Holdings LLC that engages in homebuilding business in the United States. Dream Finders Homes will report its Q2 earnings of 2021 before the bell today.

II-VI Inc. (NASDAQ:IIVI -- $67.89) develops, manufactures, and markets engineered materials, and optoelectronic components and devices worldwide. II-VI will report its Q4 earnings of 2021 before the bell today.

Kornit Digital Ltd. (NASDAQ:KRNT -- $131.00) develops, designs, and markets digital printing solutions for the fashion, apparel, and home decor segments of printed textile industry worldwide. Kornit Digital will report its Q2 earnings of 2021 before the bell today.

New Oriental Education & Technology Group Inc. (NYSE:EDU -- $2.20) provides private educational services under the New Oriental brand in the People's Republic of China. New Oriental Education & Technology will report its Q2 earnings of 2021 before the bell today.

Novanta Inc. (NASDAQ:NOVT -- $140.91) designs, manufactures, markets, and sells photonics, vision, and precision motion components and sub-systems to original equipment manufacturers in the medical and industrial markets worldwide. Novanta will report its Q2 earnings of 2021 before the bell today.

Sysco Corp. (NYSE:SYY -- $73.45) markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry in the United States, Canada, the United Kingdom, France, and internationally. Sysco will report its Q4 earnings of 2021 before the bell today.

Transdigm Group Inc. (NYSE:TDG -- $628.51) designs, produces, and supplies aircraft components in the United States and internationally. Transdigm Group will report its Q2 earnings of 2021 before the bell today.

Vishay Intertechnology Inc. (NYSE:VSH -- $22.36) manufactures and supplies discrete semiconductors and passive electronic components in Asia, Europe, and the Americas. Vishay will report its Q2 earnings of 2021 before the bell today.

Bottomline Technologies (de) Inc. (NASDAQ:EPAY -- $41.34) provides various solutions for the banking, financial services, insurance, healthcare, technology, retail, communications, education, media, manufacturing, and government industries. Bottomline will report its Q4 earnings of 2021 after the market closes today.

Coinbase Global Inc. (NASDAQ:COIN -- $280.47) provides financial infrastructure and technology for the cryptoeconomy. Coinbase Global will report its Q2 earnings of 2021 after the market closes today.

Darling Ingredients Inc. (NYSE:DAR -- $72.43) develops, produces, and sells natural ingredients from edible and inedible bio-nutrients. Darling Ingredients will report its Q3 earnings of 2021 after the market closes today.                                        

Flywire Corp. (NASDAQ:FLYW -- $35.81) operates as a payment enablement and software company in the United States and internationally. Flywire will report its Q2 earnings of 2021 after the market closes today.

fuboTV Inc. (NYSE:FUBO -- $27.93) operates a live TV streaming platform for live sports events, news, and entertainment content in the United States and Europe. fuboTV will report its Q2 earnings of 2021 after the market closes today.

Grocery Outlet Holding Corp. (NASDAQ:GO -- $31.60) owns and operates a network of independently operated stores in the United States. Grocery Outlet will report its Q2 earnings of 2021 after the market closes today.

Inari Medical Inc. (NASDAQ:NARI -- $95.26) focuses on developing products to treat and transform the lives of patients suffering from venous diseases in the United States. Inari will report its Q2 earnings of 2021 after the market closes today.

Jamf Holding Corp. (NASDAQ:JAMF -- $32.04) offers a cloud software platform for Apple infrastructure and security platform worldwide. Jamf Holding will report its Q2 earnings of 2021 after the market closes today.

Maravai LifeSciences Holdings Inc. (NASDAQ:MRVI -- $53.02) provides products to enable the development of drug therapies, diagnostics, novel vaccines, and support research on human diseases in the United States and internationally. Maravai LifeSciences will report its Q2 earnings of 2021 after the market closes today.

McAfee Corp. (NASDAQ:MCFE -- $28.63) provides various integrated security, privacy, and trust solutions to consumers, small and medium-sized businesses, large enterprises, and governments in the United States and internationally. McAfee will report its Q2 earnings of 2021 after the market closes today.

Olo Inc. (NYSE:OLO -- $38.01) provides software-as-a-service platform for multi-location restaurants in the United States. Olo will report its Q2 earnings of 2021 after the market closes today.

ON24 Inc. (NYSE:ONTF -- $32.56) provides a cloud-based digital experience platform that enables businesses to convert customer engagement into revenue through interactive webinar, virtual event, and multimedia content experiences worldwide. ON24 will report its Q2 earnings of 2021 after the market closes today.

Open Lending Corp. (NASDAQ:LPRO -- $38.47) provides lending enablement and risk analytics solutions to credit unions, regional banks, and captive finance companies of original equipment manufacturers in the United States. Open Lending will report its Q2 earnings of 2021 after the market closes today.

Pan American Silver Corp. (NASDAQ:PAAS -- $25.50) engages in the exploration, development, extraction, processing, refining, and reclamation of silver, gold, zinc, lead, and copper mines in Canada, Mexico, Peru, Argentina, and Bolivia. Pan American Silver will report its Q2 earnings of 2021 after the market closes today.

Poshmark Inc. (NASDAQ:POSH -- $34.95) operates as a social marketplace for new and secondhand style products in the United States, Canada, and Australia. Poshmark will report its Q2 earnings of 2021 after the market closes today.

PubMatic Inc. (NASDAQ:PUBM -- $31.41) provides a cloud infrastructure platform that enables real-time programmatic advertising transactions for Internet content creators and advertisers worldwide. PubMatic will report its Q2 earnings of 2021 after the market closes today.

Signify Health Inc. (NYSE:SGFY -- $28.12) operates a healthcare platform that utilizes analytics, technology, and healthcare provider networks in the United States. Signify Health will report its Q2 earnings of 2021 after the market closes today.

StepStone Group Inc. (NASDAQ:STEP -- $47.13) is an investment firm specializing in direct, fund of funds, secondary direct, and secondary indirect investments. StepStone Group will report its Q1 earnings of 2022 after the market closes today.

Stride Inc. (NYSE:LRN -- $30.75) provides proprietary and third-party online curriculum, software systems, and educational services to facilitate individualized learning for students primarily in kindergarten through 12th grade (K-12) in the United States and internationally. Stride will report its Q2 earnings of 2021 after the market closes today.

Super Micro Computer Inc. (NASDAQ:SMCI -- $38.90) develops and manufactures high-performance server and storage solutions based on modular and open architecture. Super Micro Computer will report its Q4 earnings of 2021 after the market closes today.

TaskUs Inc. (NASDAQ:TASK -- $30.99) provides outsourcing services to Internet companies worldwide. TaskUs will report its Q2 earnings of 2021 after the market closes today.

Unity Software Inc. (NYSE:U -- $110.25) operates a real-time 3D development platform. Its platform provides software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices. Unity Software will report its Q2 earnings of 2021 after the market closes today.

Upstart Holdings Inc. (NASDAQ:UPST -- $137.19) operates a cloud- based artificial intelligence (AI) lending platform. Upstart will report its Q2 earnings of 2021 after the market closes today.

WW International Inc. (NASDAQ:WW -- $30.94) provides weight management products and services worldwide. WW will report its Q2 earnings of 2021 after the market closes today.

Looking ahead to tomorrow, Wednesday will bring the core consumer price index (CPI) and a federal budget balance update. 

All economic dates listed here are tentative and subject to change.

Aluminum producer Alcoa Corp (NYSE:AA) has been on an impressive win streak lately, up 1.1% at $41.17 today as shares charge back toward their May 10, two-year peak of $44.42. The 10-day moving average has also helped guide the equity higher, and year-to-date, AA is up 77%. Plus, there's evidence AA isn't done climbing just yet, with a historically bullish signal now flashing. 

Specifically, AA is trading near a 52-week high amid historically low implied volatility (IV) -- a bullish combination for Alcoa stock in the past. According to a study from Schaeffer's Senior Quantitative Analyst Rocky White, there have been two other times in the past five years when the security was trading within 2% of its 52-week high, while its Schaeffer's Volatility Index (SVI) stood in the 20th percentile of its annual range or lower. This is now the case with AA's SVI of 47%, which sits in the lowest percentile of its annual range.

White's data shows that one month after both of these signals, the security was higher, averaging an 8.1% return. From the stock's current perch, a similar move would have AA toppling its aforementioned two-year peak, putting it just above the $48 level. 

A  shift in sentiment could give AA some leverage, too. Of the seven analysts in coverage, three still consider the stock a tepid "hold." Meanwhile, short interest is up 14.3% in the last two reporting periods, and now makes up 6.2% of the stock's available float -- ample room for a short squeeze, should some of these bears begin to hit the exits. 

Now is an opportune time to buy options on AA. In addition to the equity's extremely low SVI, which implies options traders are pricing in low volatility expectations at the moment, the stock's Schaeffer's Volatility Scorecard (SVS) sits at a high 89 out of 100. This means AA tends to outperform these volatility expectations -- a boon for buyers. 

The shares of Nio Inc (NYSE:NIO) have been middling since the start of the month, though the 60-day moving average has swooped in as support over the last two sessions. NIO was last seen up 2.7% to trade at $45.03, and the company is gearing up for its second-quarter earnings report, due out after the close on Wednesday, August 11. Ahead of the event, the stock is seeing a surge in options activity.

Nio stock has maintained its nearly constant presence on Schaeffer's Senior Quantitative Analyst Rocky White's list of stocks that have attracted the highest weekly options volume within the past two weeks, with new names added to the list highlighted in yellow. Specifically, 1,040,880 weekly calls and 464,834 weekly puts have been exchanged during this time. The most popular contract during that two-week period was the weekly 7/30 45-strike call.  

A look back at NIO's post-earnings history during the past two years shows a fairly dismal response, with only two of the last eight next-day sessions ending higher, though one of those includes the most recent first-quarter report in April. Nio stock has averaged a large post-earnings swing of 15.7%, regardless of direction. This time around, the options market is pricing in a smaller move of 10.4%. 

Now could be a good time to weigh in on the security's next move with options. The stock is seeing attractively priced premiums at the moment, per NIO's Schaeffer's Volatility Index (SVI) of 71%, which sits in the 18th percentile of its annual range. Furthermore, the security's Schaeffer's Volatility Scorecard (SVS) sits at a high 95 out of 100, meaning SYF has exceeded option traders' volatility expectations during the past year.

The shares of solar power company JinkoSolar Holding Co., Ltd (NYSE:JKS) are up 3% at $56.50 this afternoon, after the firm announced it obtained China's first photovoltaic module Life Cycle Assessment (LCA) certificate. Today's price action has brought JinkoSolar stock to a year-over-year lead of 172.2%. And though the $64 level rejected the security's mid-July rally attempt, a historically bullish trendline a bit lower on the charts could propel JKS back towards annual highs.

Specifically, JinkoSolar stock just pulled back to its 40-day moving average, after spending a few months trading above this key trendline. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, six similar signals have occurred in the past three years. After 80% of these pullbacks, JinkoSolar stock enjoyed positive returns one month later, averaging a substantial gain of 22.3%. A similar move from its current perch would put the stock at $69.10, a chip-shot away from its Jan. 27, annual high of $76.53.

Digging deeper, shorts are already hitting the exits at a rapid pace. Short interest fell 23.1% in the most recent reporting period, though the 7.16 million shares sold short make up a healthy 15.8% of the stock's available float. Should this pessimism continue to unwind, it could put even more wind at the equity's back. 

A shift in analyst sentiment could also propel JinkoSolar stock higher. Though there's just two brokerages covering the solar concern, both recommend a hesitant "hold." Meanwhile, the 12-month consensus price target of $41.19 is a 27.2% discount to current levels.

Now looks like a good time to weigh in on the security's next move with options. The stock's Schaeffer's Volatility Index (SVI) of 75% stands higher than just 18% of all other readings in its annual range, implying that options players are pricing in relatively low volatility expectations at the moment.