CFD trading on options works in a similar way across markets. However, it's vital to understand the difference between puts and calls, as well as 'selling' and 'buying' options.
Call Options
A call option is the right to buy an underlying instrument (but not the obligation to) at a certain price, referred to as the 'strike'. As an example, if you have a view that there’ll be a significant move up on the ASX 200 before day’s end (away from its current level), you could 'buy' A$10 per point of Daily Australia 200 4800 Call, which has been priced at 11-14.
It’ll mean you now hold the right, but not the obligation, to purchase A$10 per point of the Daily Australia 200 at a price of 4800. The option will have no value if the ASX 200 settles below 4800 at the end of the day as you would not exercised your right to trade the index for more than the market is worth.
For the trade, you have paid a premium of 14. It means at the worst-case scenario, you’re set to lose A$140 [14 x A$10] should the option become of no value. To break even, you need the ASX 200 to reach 4814 [4800 (the strike) + 14 (the premium)]. For each point that the ASX 200 finishes above 4814, you’re set to make A$10 profit, with no maximum.
This demonstrates that when buying options (either put or call options) your risk is strictly limited, however your profits are unlimited.
Put Options
A put option is the right to sell an underlying instrument (but not the obligation to) at a certain price.
As an example, you believe the ASX 200 will have a big downwards move. As such, you buy A$10 per point of a 4800 Put, currently priced at 13-16, purchasing yourself the right to sell at a fixed price.
It’ll mean you now hold the right, but not the obligation, to 'sell' A$10 per point of the Daily Australia 200 at 4800. For this trade you have paid a premium of 16. The worst case scenario therefore is that you can lose A$160 [16 x A$10] should the option become of no value (ie. if it expires above 4800).
To break even, you need the ASX 200 to fall to 4784 [4800 (the strike) - 16 (the premium)]. For each point the ASX 200 finishes under 4784, you’re set to make a profit of A$10.
You can see that when buying both put options and call options your risk is strictly limited, however your profits can be unlimited.
Selling Calls and Puts
In addition to purchasing puts and calls, you can sell or open 'short' positions on them. In this scenario, you receive a fixed premium, however your risk is unlimited. This is also known as 'writing' options.
As an example, the Australia 200 March 4700 Call is priced at 55-59. Hoping the price of the index will fall, you decide to sell this at A$10/point.
If the official ASX 200 Index March settles below 4700, you’ll make a profit of A$550 [55 x A$10]. The break-even point for this trade is 4755 [4700 (strike) + 55 (premium)].
In this case however, your potential loss is unlimited. Every point above 4700 level equates to A$10. If the ASX 200 settles at 4900, you will lose A$1450 [4900 (settlement) – 4755 (break-even) x A$10 (trade size)].
So it’s important to remember, when buying an option, your risk is limited, to a maximum (the stake x premium). However when selling options, your risk can be unlimited and the deposit will be based on what’s required to trade on the underlying market.
Options expiries
- Daily Options expire at the close of the underlying market on the day you place your trade. For example, if you open a trade on a Daily Australia 200 Option at 10.30am, it’ll close at a value based on the official settlement of index that afternoon.
- Long-term Options offers you the opportunity to take a view on the volatility of an underlying futures market, along with the directional movement, over a three-month period. We have a huge range of 24-hour long-term options, including: Australia 200 futures, FTSE® 100 futures, Wall Street futures, popular forex pairs, commodities like gold, wheat and coffee, plus more.