Options trading is not for everyone. The spread betting guide will help advise but it can be a complicated and costly gamble on financial instruments. However, it can also be a rewarding way of backing your judgement with huge payback for a small initial margin requirement.
A spread bet option only has a value for a fixed period of time, up until its expiry date. Its value will decrease the closer it gets to its expiry.
There are two basic types of option: calls and puts. They have similar definitions, but differ in one vital respect:
- The holder of a call option has the right, but not the obligation, to buy a given asset at a fixed price (known as the strike price) on or before a given day (the expiry date).
- The holder of a put option has the right, but not the obligation, to sell a given asset at a fixed price on or before a given day.
So, when spreadbetting on options, you could purchase a call option if you expected the asset to go up in value, and you would buy a put option if you expected the asset to go down in value. In both cases, because you are purchaseing an option, your maximum loss is limited: you could lose only your stake multiplied by the option value. For example, if you bought an option valued at 20 for £10 per point, then your theoretical maximum risk would be £200 (20 x £10). An option can never have a negative value; it can only become worthless. However, as long as you buy an option, there is potentially no limit on your profit.
Every market has a range of strike prices for both calls and puts. The value of an option is dependent on the length of time that the option has to run (its time value), its volatility and its intrinsic value.
Intrinsic value: this is a measure of the underlying price of the asset compared to its strike price. For example, if you bought a call option with a strike price of 2,000 and the underlying market stood at 2,200, then the intrinsic value would be 200, or in-the-money by 200 points. Likewise, if you bought a put option with a strike price of 100 and the underlying market stood at 80, then the intrinsic value according to the spread betting guide would be 20.
Time value: the longer that option has until it expires, the greater its time value. This is because the probability of a particular option being in-the-money on expiry is greater if it has, say, three months to run rather than one. At expiry, the time value will be zero, so the option will expire either worthless or with no intrinsic value.
Volatility: the greater the volatility of the underlying market, the more expensive the option will be. That is because the greater the risk to the market-maker and the greater the potential for you to make money.
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