Options are often labelled as ‘complicated’ and ‘hard to understand’, which is a common misconception. Trading Option CFDs is simple and can provide you with a limited risk alternative to speculating on the financial markets.
With City Index, you can trade Option CFDs on our most popular indices, currencies and commodities.Our Option CFDs start from just £1 per point on daily Options and £10 per point on our monthly Options.
What are Options?
There are two types of Options, a Call and a Put.
A Call Option is the right to buy a particular market at a fixed price on or before a specific date in the future. For example, FTSE 100 June 5700 Call essentially gives you the right to buy the FTSE 100 at 5700 at or before the June expiry. What you would be hoping is that the FTSE 100 rallies beyond the 5700 strike price and thereby locking in a profit by exercising the Option, as you can now buy the FTSE 100 at a cheaper level than the underlying. This is said to be when the Option has intrinsic value.
Similarly, a Put Option is the right to sell at a predetermined level.
Option CFDs work in the same manner but they will always be cash settled (i.e. you will not actually buy or sell the underlying at expiry).
Features of Option CFDs
- Low margins¹
- Ability to profit from static markets
- When you buy an Option CFD your risk is limited to the price of the option, multiplied by your trade size. However, please be aware that when you sell an Option CFD your risk is unlimited
Options can be extremely versatile and are often under utilised when considering managing the overall risk of a portfolio. Whether you are considering using Options as a defensive tool (buying put Options) or as upside protection (buying call Options) they can be extremely useful in helping to manage your portfolio in a more effective way. Investors are drawn to purchasing Options as a form of insurance on an event occurring that may be detrimental to an existing position. A key benefit of this tactic is that the maximum liability of the Options trade is known from the outset.
For example, if you thought the FTSE 100 was over bought at its current level, you could consider buying a Put Option to profit from a potential correction in the market or to protect an existing long portfolio which you may not want to liquidate at this time. Indeed, Options have been gaining in popularity as a tool used by traders and in fact more traders were drawn to use Options throughout the recent bear market, as a key tool to help bring down their risk exposure.
¹Lower deposit rates may allow you to increase your risk.
How to Trade Option CFDs
Call Option Example
Say it is June and the UK 100 cash is at 4920. Our UK 100 Sep Call 4900 price is at 132/136.
Going Long on a Call Option
You expect the UK 100 to rally over the coming weeks and therefore open a buy position (go long) of £10 per point at 136.
Over the next few weeks the UK 100 rallies following the release of some positive UK economic data. The latest UK 100 cash level is now 5100 and the UK 100 September Call 4900 price is at 275/279. Having reached a comfortable level of profit, you decide to cash in your gains by selling £10 per point at 275 (our sell price).
Result: You bought at 136 and sold at 275, which represents a 139-point movement in your favour which, at your trade size of £10 per point, nets you a profit of £1,390 (275 - 136 x £10).
Alternative scenario: If however, the UK 100 had fallen, you would net a £10 loss for every point the Option price moved lower up to a maximum of the price you paid x your trade size; £1,360 (0 – 136 x £10).
Going Short on a Call Option
You expect the UK 100 to fall over the coming weeks and therefore open a sell position (go short) of £10 per point at 132. This means that for every point that the Option falls, you will net a profit of £10.
Over the next few weeks the UK 100 falls following some poor company earnings. The latest UK 100 cash level is now 4815 and the UK 100 September 4900 Call price is at 65/68. Having reached a comfortable level of profit, you decide to cash in your gains by buying back £10 per point at 68 (our buy price).
Result: You sold at 132 and bought back at 68, which represents a 64-point movement in your favour which, at your trade size of £10 per point, nets you a profit of £640 (132 – 68 x £10).
Alternative scenario: If however, the UK 100 had rallied, causing the price of the Option to rise to 228/232, you would net a £1,000 loss (132 - 232 x £10).
Put Option Example
Let's say it is June and UK 100 cash is at 4920. Our UK 100 September Put 4900 price is at 140/143.
Going Long on a Put Option
You expect the UK 100 to fall over the coming weeks and therefore open a buy position (go long) of £10 per point at 143.
Over the next few weeks the UK 100 falls following some poor company earnings. The latest UK 100 cash level is now 4815 and the UK 100 September Put 4900 price is at 298/302. Having reached a comfortable level of profit, you decide to cash in your gains by selling £10 per point at 298 (our sell price).
Result: You bought at 143 and sold at 298, which represents a 155-point movement in your favour which, at your trade size of £10 per point, nets you a profit of £1,550 (298 - 143 x £10).
Alternative scenario: If however, the UK 100 had risen, you would net a £10 loss for every point the Option price moved lower up to a maximum of the price you paid x your trade size; £1,430 (0 – 143 x £10).
Going Short on a Put Option
You expect the UK 100 to rally over the coming weeks and therefore open a sell position (go short) of £10 per point at 140. This means that for every point that the Option falls, you will net a profit of £10.
Over the next few weeks the UK 100 rallies following the release of some positive UK economic data. The latest UK 100 cash level is now 5100 and the UK 100 Sep Put 4900 price is at 68 / 71. Having reached a comfortable level of profit, you decide to cash in your gains by buying back £10 per point at 71 (our buy price).
Result: You sold at 140 and bought back at 71, which represents a 69-point movement in your favour which, at your trade size of £10 per point, nets you a profit of £690 (140 – 71 x £10).
Alternative scenario: If however, the UK 100 had fallen, causing the price of the Option to fall to 40/43, you would net a £970 loss (43 - 140 x £10).
Spread betting and CFDs are leveraged products and can result in losses that could quickly exceed your initial outlay, so please make sure you fully understand the risks involved.
