Trading Options CFDs works in a similar way across different markets. It's important to understand the difference between puts and calls, and 'selling' and 'buying' options.
Buying Call and Put Options
A Call Option is the right to buy an underlying instrument at a specified price, within a specified timeframe. A Put Option is the right to sell an underlying instrument at a certain price, within a certain timeframe.
The party who has sold a Call is obliged to provide the asset at that price, should the buyer choose to exercise his right to buy on or before the expiry time.
For example, if you think there will be a significant increase in GBP/USD before the day’s end, you could 'buy' one contract at US$10 per point of GBP/USD 150,950 Call, which has been priced at 11-14.
This will mean you hold the right, but not the obligation, to purchase 1 contract of the GBP/USD at a price of 150,950. The option will have no value if the GBP/USD settles below 150,950 at the end of the day, as you would not have exercised your right to trade the currency for more than the current market value.
For the trade, you have paid a premium of 14. This means that in the worst-case scenario, you could lose US$140 (14 x US$10) should the option become of no value. To break even, you would need the GBP/USD to reach 150,964 [150,950 (the strike) + 14 (the premium)]. For each point that the GBP/USD finishes above 150,964, you’re set to make US$10 profit, with no maximum.
This demonstrates that when buying options (either puts or calls) your risk is strictly limited, while your profits are unlimited.
Selling Call and Put Options
You can also sell or open 'short' positions on Put and Call Options. In such a scenario, you receive a fixed premium, but your risk is unlimited. This is sometimes known as 'writing' options.
For example, the Australia 200 March 4700 Call is priced at 55-59. Expecting the index’s price to fall, you sell this at A$10/point.
If the official ASX 200 Index March were to settle below 4700, you would profit A$550 [55 x A$10]. The break-even point for this trade is 4755 [4700 (strike) + 55 (premium)].
That being said, in this scenario, your potential loss is unlimited. Every point above the 4700 level equates to A$10. If the ASX 200 were to settle at 4900, you would lose A$1450 [4900 (settlement) – 4755 (break-even) x A$10 (trade size)].
It’s important to bear in mind that 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
Long-term Options let you take a position on the volatility of an underlying futures market, as well as the direction, over a three-month period. IG Markets provide a broad range of 24-hour long-term options, including major forex pairs, FTSE® 100 futures, Wall Street futures, commodities such as crude oil, and more.