The Chicago Board Options Exchange pioneered index option trading when it launched options on the S&P 100 Index, or OEX. The S&P 100 includes 100 of the largest companies with shares listed on the U.S. stock exchanges.

Standard & Poor's decides which stocks will be added or removed from the OEX. To be included, a stock must be among the more actively traded and have listed options. When options began trading on the index itself in the early 1980s, they quickly became popular among traders. Since then, however, a number of competing indexes have emerged that also allow option strategists to trade the market.

The S&P 100 European-Style Index, or XEO, began trading in July 2001. Both are cash-based indexes. Therefore, the options settle for cash (not shares, as with stock options). However, the way the OEX and the XEO settle is different. Prior to 1983, when the CBOE launched OEX options trading, strategists were limited to trading stock options.

Just like today, all stock options settled American-style, which means that exercise can take place any time prior to expiration. Naturally, then, when OEX options began trading, they also settled American-style. However, since then, many index options used the European-style settlement feature, which removes the risk of early assignment associated with strategies like credit and calendar spreads.

The XEO was the CBOE's response to the growing popularity of European-style options. It offered traders a way to play the S&P 100, but with European rather than American-style options.

The iShares S&P 100 (OEF) has become a viable tool for strategists seeking to play not just one or two stocks, but the market as a whole. Options on this investment vehicle were launched in February 2001. The OEF isn't an index, but an exchange-traded fund.

Like other ETFs, iShares can be bought and sold like a stock, which isn't possible with the cash-based XEO and OEX. Consequently, settlement of OEF options also takes place like stock options. That is, the options settle for shares, not cash. In addition, like other stock options, the OEF exercises American-style.

The OEF is equal to roughly one-tenth of the OEX, which makes the strike prices and option premiums much less than the cash-based index. This security can be more suitable for smaller traders looking to place spreads, straddles or other complex strategies on the market.

Instead of trading the S&P 100 Index, some traders prefer the

S&P 500 Index

. The S&P 500 includes 500 of the largest companies trading on the U.S. stock exchanges. S&P 500 options are among the most actively traded index options today. In addition, the options on this cash-based index settle European-style, but they're the domain mainly for larger professional investors.

Alternatively, option traders can implement strategies on the

Dow Jones Industrial Average

. The Dow is one of the world's oldest indexes, and today it includes 30 of the largest companies with shares listed on the U.S. exchanges. Options are listed on two competing index products that are designed to equal 1/100 of the value of the Dow.

The DJX options are cash-based and settle European-style. Since their debut in 1997, DJX options have become among the most popular tools for trading the market.

Finally, the CBOE launched trading on the

Diamonds Trust

(DIA) - Get Report

in May 2002. Like the OEF, the DIA is actually an exchange-traded fund. Consequently, DIA shares can be bought and sold like shares of stock throughout the trading day.

Like the DJX, Diamonds are designed to roughly equal 1/100 of the value of the Dow Jones Industrial Average. For example, while the Dow Jones Industrial Average recently traded near 8,500, both the DJX and DIA were near 85. The difference between the DJX and DIA, however, is that the former settles European-style and for cash, while the latter settles American-style and for shares.

By Frederic Ruffy, senior writer and index strategist at

Optionetics.com. Visit

his forum.