A Range of Options
The current period of flux in both the equity and commodity markets can make it daunting to hold your nerve over the long term.
Perhaps you think the FTSE 100 is on the road to recovery but are worried about being stopped out on sharp intraday falls? Or you might like to take a macro view on the price of a commodity such as Wheat, but are concerned by the size of some of the daily movements? Trading on an option rather than a futures contract can give you the exposure you want while controlling the potential sting in its tail.
How does trading on options work?
An option is a financial instrument that gives the holder the right to buy or sell an underlying instrument at a previously agreed price (known as the ‘strike’ of the option). The price of an option reflects its potential expiry value, and depends upon factors such as the length of time it is valid for (generally, the more time on offer, the more expensive the option) and the current level of the underlying market in relation to the strike.
It is important to note that when you trade on an option with IG Markets the option will not be exercised on expiry. Instead the trade will settle at its expiry value, as follows:
- For a call option the expiry value is the level of the underlying market minus the strike price
- For a put option the expiry value is the strike price minus the level of the underlying market
- In neither case can the expiry value be less than zero
If you believe a market is heading lower, buying a ‘put’ option can give you a limited risk exposure to a downwards move. If you think a market is going higher, buying a ‘call’ option can give you a limited risk exposure to an upwards movement. The price of any option will obviously vary continuously as the underlying market moves, enabling you to trade out of a position if desired before expiry.
A further potential advantage of trading options as a CFD is the increased degree of leverage you can achieve. This is because, when you go long of our option price, the most you can lose is the deposit, which is the opening price x the number of contracts x the tick value ($10 per point, for example).
By contrast, the margin requirement to open a position on a futures contract will normally be higher, as your risk is not protected. IG Markets offers a wide array of options products around the clock with daily, monthly and quarterly markets on the major stock indices, currencies and commodities. You can also trade share options on leading UK, US and European equities. In addition to the thousands of prices available online, it may also be possible to trade on further, not listed, strikes over the telephone.
Please call your dealer for more information.
The above comments do not constitute an investment advice and IG Markets accepts no responsibility for any use that may be made of them.
15/01/08