I am researching writing covered calls on S&P500 index. So in order to sell covered call I need to buy a contract for S&P500 index. I've never traded indexes. What exactly I will be buying (since this index is a composite of 500 stocks...)? How much will this contract cost? How does it work? Thank you so much in advance! :)
The SPDR® S&P 500 ETF Trust (symbol SPY) seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.
Options are available on the SPY:
The call's premium will depend on the strike price and expiration week/month chosen (100 times the quote). Since you are writing (aka selling) a covered call, you will sell one call per hundred shares of SPY that you own. You will receive the premium as a credit.
If this is anything other than a homework assignment, consider doing some serious reading about options in order to avoid being cannon fodder :->)
You can buy shares of exchange traded funds and sell covered calls on those funds. Look at SPY, VOO, & IVV as some common examples.
To sell a covered call you do not need to buy a contract instead you need to buy 100 shares of a security that tracks the S&P500.
You should consider buying one of the common S&P 500 tracking ETFs such as SPY, VOO or IVV.
To facilitate this you will have to open an option trading brokerage account or add options trading to your existing brokerage account (where you own at least 100 shares of the S&P500 ETF security you have chosen).
Once you own the securities AND you have the options trading agreement in place, then you will be able to sell a covered call (1 covered call per 100 shares).
As to how you place the actual trade, it will be very similar to trading any security but you will have to choose the strike price and date for the contract you will sell.