New to options?
Learn more about how spread betting with options works.
What is an option?
An option is a financial product that allows you to bet on the future position of an underlying market, by 'buying' or 'selling' the right (or option) to trade it at a certain price.
An option example
The current underlying price of gold is $1200 per ounce and you believe it is set to rise. You would like to be able to continue to 'buy' it at or around the same price.
You 'buy' an option to deal at $1210 (in this case a call option). You are 'buying' the right, but not the obligation, to 'purchase' gold at $1210, on or before a certain expiry time.
This level is known as your 'strike price' and you would pay a premium for it.
Should the price of gold rise and reach $1300 per ounce, your option – the right to 'buy' at $1210, a much lower price than the current market value will enable you to 'buy' the gold at a cheaper rate, or 'sell' the option for a
However, if the price of gold decreases to $1150 (when your option expires), your right to 'buy' gold at $1210 would be of no value: there is no purpose in 'buying' gold at a higher price than the current market level.
You would therefore lose the premium you paid for the option. If you have a longer-term option, however, you could retain it and hope the underlying price moves back in your favour, before it expires.
It's important to know that you are not physically selling or buying an option and that it can never be exercised. You are trading on the value of the option.
How it works
The price of an option is based on several factors, mainly:
- The level of the underlying market relative to the strike price
- The underlying volatility of the market
- The time the option has left to expiry
Spread betting options are split into two types: calls and puts.
- A call option is the right to buy an underlying instrument at a certain price
- A put option is the right to sell an underlying instrument at a certain price
Spread bets are leveraged products. Spread betting may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.