At the operational level, how do security contracts compare versus index-based contracts?
The basic fact is that index-based contracts attract a much more substantial order-flow, which helps them have tighter spreads (i.e. greater liquidity). At a more basic economic level, we say that there is less asymmetric information in the index (as opposed to securities, where insiders typically know more than others), which helps index-based trading have better liquidity. At settlement, in the case of security-options, there is the possibility of delivery, and in that case arises the question of depository vs. physical delivery. Both alternatives are quite feasible. However, in index-based contracts, that question does not arise since all index-based contracts are cash-settled. The index has much less volatility than individual securities. That helps index options have lower prices, and index futures can work with lower margins. The most important difference between the index and individual securities concerns manipulation. Given that an index is carefully built with liquidity consi
