Example: 'Buying' a FTSE 100 Daily Bungee

The FTSE 100 Index is trading at around 6050 and you think it is going to rise over the day.

We are quoting 6055 - 6059 for our FTSE 100 Daily Bungee: Floor 6040.

You decide to bet £5/point that the Bungee price will rise above our 'buy' price of 6059. You know that your maximum potential loss is just 19 points, as the Floor level is fixed at 6040 (6059 minus 6040 = 19). (Remember, you cannot 'sell' a Bungee with a Floor; to go short you would 'sell' a Bungee with a Ceiling.)

Soon the FTSE rises and with it your Bungee: by midday the Bungee price is riding high at 6098 - 6102. At this point you could sell out for a 39-point (£195) profit but you hang on, thinking there is more to run.

However the choppy market turns against you and before long the FTSE is trading down at 6020. Your bet is safely 'frozen' at the specified Floor as the Bungee price now stands at 6040 - 6044. If the FTSE recovers you could come back into profit; if not you still cannot lose more than 19 points (£95).

Wall Street opens across the Atlantic and immediately rallies. The FTSE follows suit. Your Bungee is reactivated - and, in this scenario, you are ahead once more.

Your position expires at the market close of 6110.

The result

Profit: 51 x £5 per point = £255

• Bungee Example

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