Trading volatility enables you to take advantage of future volatility levels across a range of global markets.
Trading volatility using options
If you think there will be significant movement in a particular market, you can 'buy' volatility using options. However, if you believe the market will be flat, you can use options to 'sell' volatility.
You believe there will be a big move on the FTSE® 100 (away from its current level of 5300) so you decide to 'buy' 'Daily FTSE®' options to take advantage of this.
- £10 of the 5300 call at 14
- £10 of the 5300 put at 16
You have 'bought' a 'Daily 5300 FTSE®' straddle.
Because you have paid a total premium of 30 (14+16), you need the FTSE 100 to move 30 points away from 5300 in either direction (5270 or 5330) to break even. So, for every point that the FTSE moves beyond 5270 or 5330 you make £10.
In our example, the FTSE finishes higher at 5372. You make 42 points overall.
|Profit on trade|
|Profit on trade: 42 x £10 = £420|
Your worst-case scenario would be the FTSE not moving and finishing at 5300. If this happened you would lose £300 (£30 [your premium] x 10 [your stake]). This £300 represents your total risk on this position.
In this above example you are 'buying volatility' on the FTSE 100, rather than simply 'buying' or 'selling' the FTSE, which you would do with a more traditional 'Daily FTSE®' trade.
You believe it is unlikely that GBP/USD will move more than 102 points before the close and choose to sell both the daily GBP/USD 16600 Call and the 16600 Put.
- £10 of the 16600 Call at 52
- £10 of the 16600 Put at 50
You have a sold a 'daily 16600 GBP/USD' straddle.
Because the total premium you received was equivalent to 102 points (52 + 50), you need GBP/USD to close within 102 points of 16600 to finish in profit. For every point beyond this level, under 16498 (16600 minus 102) or over 16702 (16600 plus 102), you will lose £10 per point.
In our scenario, sterling falls against the dollar, with the pair closing the day at 16485.
|Loss on trade|
|Loss on trade: 13 x £10 = £130|
In this example you know your best-case scenario: GBP/USD does not move at all and closes at exactly 16600. This means both options finish without value and you make:
£1020 (102 [your premium] x £10 [your stake])
However, it is important to understand that when selling options your risk is unlimited.
In this example you are 'selling volatility' on GBP/USD, and therefore backing a view that there will be relatively little movement in GBP/USD on the day.
CFDs are leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.