Types of options
Before you start spread betting on options, it's important to know the difference between calls and puts, and 'buying' and 'selling' options.
A call option is the right to buy an underlying instrument (for example the FTSE® 100) at a certain price, known as the 'strike'. For example, if you believe there will be a big move up on the FTSE® 100 before the end of the day (away from its current level), you could decide to 'buy' £10 per point of Daily FTSE® 5500 Call which has a price of 11-14.
What does this mean?
This means that you now hold the right, but not the obligation, to 'buy' £10 per point of the Daily FTSE® at a price of 5500. The option will be worthless if the FTSE® settles below 5500 at the end of the day, because if you exercised your right to 'buy' you would be paying more than the market is worth.
Potential profit and breaking even
For the right to 'buy' at 5500 you have paid a premium of 14, meaning the worst-case scenario is that you can lose £140 (14 x £10) should the option become worthless. To break even you need the FTSE® to reach 5514 (5500 (strike) + 14 (premium)). For every point that the FTSE® settles above 5514 you make £10 profit, with no maximum.
This shows that when 'buying' options (either calls or puts) your risk is strictly limited, but your profits are unlimited – the chart below outlines how this might work in practice.
A put is the right to sell an underlying instrument at a certain price. So for example, you believe the FTSE® will have a large move, but this time you think it will be a move down. Therefore you 'buy' £10 per point of a 5500 put, currently priced at 13-16, buying yourself the right to 'sell' at a fixed price.
What does this mean?
This means that you now hold the right, but not the obligation, to 'sell' £10 per point of the Daily FTSE® at a price of 5500. For this right you have paid 16, therefore the worst case scenario is that you can lose £160 (16 x £10) should the option become worthless (i.e. if it expires above 5500).
Potential Profit and Breaking Even
To break even you need the FTSE® to fall to 5484, that is: (5500 (strike) - 16 (premium)). For every point the FTSE® settles below 5484 you make £10 profit.
As before, you can see that when 'buying' options (whether calls or puts) your risk is strictly limited, but your profits are potentially unlimited.
Selling Calls and Puts
In addition to 'buying' calls and puts, you can also 'sell' or open 'short' positions on them. This is sometimes known as 'writing' options. In this case you receive a fixed premium, but your risk is unlimited.
For example, the FTSE® June 5400 call is priced at 55-59. You 'sell' this at £10 per point, hoping the price of the FTSE® will fall.
If the official FTSE® Index March settlement is below 5400 you make a profit of £550 [55 x £10]. Your break-even level is 5455 [5400 (strike) + 55 (premium)].
However, in this case your potential loss is not capped and each point above 5400 is worth £10. If the index settles at 5600 you will lose £1450 [(5600 (settlement) - 5455 (break-even) x £10 (bet size)].
So, when 'buying' an option your risk is completely limited, to a maximum of (premium x stake). However when 'selling' options, your risk is potentially unlimited and the deposit we require will be based on the deposit required to bet on the underlying market.
- Daily options expire at the close of the underlying market on the trading day of your bet. So if you open a bet on a Daily FTSE® 100 option at 11.30am, it will close at a value based on the official settlement of the FTSE® 100 that afternoon.
- Long-term options allow you to take a view on the volatility of an underlying futures market, in addition to the directional movement, over a three-month period. Our wide range of 24-hour long-term options include: FTSE® 100 futures, Wall Street futures, commodities like gold, wheat and coffee, plus popular forex pairs and interest rates.
- We also quote on a range of share options across the UK, US and European markets, inlcuding FTSE® 100 shares and a selection of leading US shares. See our shares list for more details.
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.