In the traditional trading market (not the CFD market) an Option is a contract where the seller gives the right (not the obligation) to the buyer to buy or sell an underlying trading tool such as, for example, a stock, commodity, index, futures, Forex currency or another asset. This comes with a predetermined price (the strike price) that the underlying instrument needs to reach before an expiry date. In the CFD market, rather than actually owning any options, the buyer/seller has the opportunity to speculate on the price difference of the opening and closing of the Option. When the Option expires, the position is closed at the last available rate.
Some useful vocabulary about Options that you should know before start:
1) The Underlying Instrument: the name of the instrument on which the option is based.
2) Call and Put: in the CFD market, the buyer of a Call Option speculates that the price will rise; the buyer of a Put Option speculates the price will fall. The Option CFD holder does not have the right to buy or sell, but will either receive profit or incur a loss from the difference in the opening and closing price.
3) The Strike Price: the strike price is the price of the underlying tool on which the contract is set: “Apple - Call 200 - Jun” is a contract based on the price of Apple being above, or below, $200 when it expires in June. In this case, the Strike Price is $200. A buyer of this contract expects the price of Apple shares to be above $200 when it expires.
4) Expiry Date: if the rate of the underlying instrument does not reach the Strike Price before this date, the Option will expire with small or no value. The longer time duration an Option has the more chance the market will move in the holder’s favour, so to say, the closer the contract gets to the expiration date, the less the time value of the option. Options are affected by time value in the same way as the underlying instrument.
Why Should I Trade with Options?
Trading with Options generally offers greater exposure than trading other instruments, such as Share CFDs and greater volatility! This means you can open larger positions with less capital.
Let's say that trading tool "Brent oil" is now costs 45 USD, there is a call option with a strike price of 40 USD, this option gives the right to buy BRN at 40. The cost of such a right will depend on the market situation and will not be great, but, suppose, the cost will be 5 euro. Then let's suppose that the current price from 45 has dropped to 41, then, following the previous logic, a call option with a strike price of $ 40 will already cost 1 euro.
The trading instrument will be the change in the value of the option from 5 euro to 1 euro. This means that Brent movement from 45 to 41 is about 10%, while at the same time the option fell from 5 euro to 1 euro, which is 80%!
So now let us compare, for example, if you've trade with a multiplier 20, price has changed within 10%, you will receive a profit of 100%. If you've used an option with a multiplier 10, the price movement is 80% and the profit will be 800%, that's twice more with the lower value of multiplier!
In the end we should say, that trading Options may bring many benefits. These include increasing your market exposure as Options offer more leverage than other underlying instruments such as Shares CFDs. Our platform offers risk management tools that can help you with risk reversal. Although trading Options has its advantages, there are significant risks involved as well, because they are traded with multiplier. But if you are looking to speculate and receive greater profit then Options may be something you can consider.