Buying a Put
You take the view that the EUR/USD is due to decline sharply in the weeks ahead. Consequently, you would like to place an option trade to capitalise should this happen, but risking no more than US$1000 in the event your expectations prove wrong.
The front month EUR/USD future is currently trading at 13,960 and the 13,700 Put Option is currently trading at 91-100. You buy a put option at 100 in US$10/point.
Your premium – the maximum amount you are risking - on this trade is US$1000 [100 x US$10].
If EUR/USD is higher than 13,700 at expiry, you will lose the full premium of US$1000, as the option will expire with no value.
If EUR/USD expires below the strike price of 13,700, it will be worth US$10 for every point below 13,700. EUR/USD will need to settle below your break-even level of 13,600 [13,700 - 100] for you to register a profit.
So if EUR/USD expires at 13,525, the option will settle with a value of 175 (the difference between the strike price and the settlement level). It will mean you've made 75 points on the trade as you've paid 100 for the option. The profit on your option will equate to US$750.
Your profit/loss is:
75 (points gained) x US$10 (stake) = US$750 (profit)
Selling a Call
As you have a bearish view on the market, you decide to sell a call. Unlike buying a put, when selling a call the trade has no loss limit, so you are subject to greater risk.
Conversely, an advantage of selling a call option is that you can profit even if there is no significant move in either direction in the underlying market.
The Dec Australia 200 is currently trading at 4600, while the Dec 4800 Call Option is priced at 87 - 93. You sell the option at 87 in A$10/point. For this, you receive a premium of A$870. In this instance, this is the maximum profit you could make, while there is no cap on your potential losses.
If the Australia 200 is under 4800 when the option expires, it will settle with no value and you will receive the full premium of A$870.
Should, however, the Australia 200 expire above the strike price of 4800, the option would cost you A$10 for every point above 4800. As you sold it at 87, the index would have to settle below 4887 (your break-even level, 4800 + 87) to return a profit.
So, if the Australia 200 expires at 4950, the option will settle with a value of 150 (the difference between the strike price and the settlement level). Since you only received 87 for the option, you have lost 63 points, which equates to a loss of A$630.
In this instance your profit/loss would be calculated as follows
63 (points lost) x A$10 (stake) = A$630 (loss)