Essential Option Strategies. J. J. Kinahan

than the Dow, the methodology used to compute the S&P 500 is different as well. The industrial average is price weighted, and stocks with higher prices within the index exert more influence than low-priced ones. On the other hand, the S&P 500 is a market-value-weighted average.

The top twenty S&P 500 companies account for just 4 percent of the five hundred stocks, but as of this writing, they represent nearly 30 percent of the market value. Table 2.2 shows the largest companies, which include Apple, Microsoft, and Exxon in the top three spots. Because market value is computed as shares outstanding multiplied by share price, it's the biggest companies that dominate the S&P 500 and drive its performance from one day to the next.

Table 2.2 Largest S&P 50 °Companies as of April 29, 2016

      Source: CBOE.com

      The Dow and S&P 500 are not the only two indexes that track the performance of large-cap stocks. The NASDAQ Composite Index represents share prices of companies that trade on the NASDAQ Stock Market. While the NASDAQ Composite does not have listed options, the NASDAQ 100 Index (.NDX) is a separate index that does have puts and calls linked to its performance. The index includes the top one hundred nonfinancial names that trade on the NASDAQ, and large-cap tech names like Apple, Microsoft, and Oracle dominate the index.

Thinking Caps

      Capitalization, or cap, refers to the size of a publicly traded company and is computed as the number of shares of the company outstanding multiplied by the current market price. So if a company has 10 million shares outstanding and a $20 stock price, the market cap is $200 million.

      Beyond the large-cap Dow, S&P 500, and NASDAQ, a number of mid- and small-cap indexes exist as well. There are, in fact, too many to list here. Table 2.3 summarizes some of the more popular ones. Note that not all of them have listed futures or options contracts.