The price is right.

Can you stomach the highs and lows of index options?

You're probably familiar with index funds, mutual funds that track a particular stock market index such as the Dow Jones Industrials or the Standard & Poor's 500. More adventurous investors use stock index options to protect their portfolios against stock market corrections.

Stock index options are agreements pegged to the performance of the underlying index. These might be call options, the right to buy the index, or put options, the right to sell the index. Both types of options may be bought or sold and exercised at a given price up to a certain date. However, because the average price is $30,000--too large a sum for individual investors--these options are rarely exercised, but they are traded.

Why would you want to master such concepts? Because of the chance to earn bigger profits, even though the broad stock market is making modest moves. To see how this might work, here's an example involving options known as OEX, which cover the S&P 100 Index of giant companies. "The OEX is the stock index option most actively traded among individual investors," says Stanley Marszalk, vice president of CMI Business Services Inc. in Destin, Florida, which publishes The Index Options Trader ($95 for six weeks; www.theoptiontrader.com).

Recently, the S&P 100 Index was hovering around 780 index level. At that index level, each OEX option covered $78,000 (780 times $100) worth of stock. Yet options to buy the index at 780, with expiration in one month, were listed around $1,900. (The newspaper listing was 19, but you multiply that by $100 to get the price.)

If the stock index goes up, so will your option. "Suppose the index is trading at 820 at expiration date," says Bill Ryan, a manager of the options industry services call center at the Options Clearing Corp., a financial derivatives clearinghouse in Chicago. "You have the option to buy at 780, 40 points below the market price, so your contract is worth about $4,000: 40 times $100."

You can sell put and call options on stock indexes and pocket the premiums. These trades are risky, though, because your losses are unlimited if the market moves against you. Ryan advises investors to start slowly when it comes to investing in options. Websites from the Chicago Board Options Exchange (www.cboe.com) and the Options Industry Council (www.888options.com) can help you weigh your options in this risky but potentially rewarding market.

WORDS TO THE WISE

STOCK INDEX OPTIONS    Publicly traded rights. Prices move in sync
                       with the performance of a specified stock
                       market index.

CALLS                  Options to buy at a certain price up to a
                       certain date.

PUTS                   Options to sell at a certain price up to a
                       certain date.

STRIKE PRICE           Price at which an option can be exercised.

TRIPLE WITCHING HOUR   Final trading hour of the third Friday of
                       the month, when listed options expire.

IN-THE-MONEY           An option that has current value. Either
                       (1) a call where the exercise price is below
                       the trading price or (2) a put where the
                       exercise price is above the trading price.

OUT-OF-THE-MONEY       An option with no current value.