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 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.
Key vocabulary to know before you start
The Underlying Instrument
The name of the instrument on which the option is based.Call and Put Options
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.The Strike Price
The price of the underlying tool on which the contract is set. For example: "Apple - Call 200 - Jun" means a contract based on Apple being above or below $200 when it expires in June. The Strike Price is $200. A buyer expects Apple shares to be above $200 when it expires.Expiry Date
If the rate of the underlying instrument does not reach the Strike Price before this date, the Option will expire with little or no value. The longer time duration an Option has, the more chance the market will move in the holder’s favor. However, as the option nears expiry, its time value decreases.
Why should I trade with options?
Trading with Options offers greater exposure compared to trading other instruments like, Share CFDs, as well as greater volatility. This means you can open larger positions with less capital.
Example: options in action
Let’s say the trading tool "Brent Oil" now costs 45 USD. There is a Call Option with a strike price of 40 USD. This option gives the right to buy Brent Oil at 40 USD. The cost of such a right depends on the market situation and might not be great — let’s assume it costs 5 EUR.
If the price of Brent Oil drops from 45 to 41 USD, the cost of the option would decrease to 1 EUR.
Profit comparison: trading with options vs. leverage
Price Movement: 45 → 41 USD (a 10% drop).
Option Movement: The value of the option decreases from 5 EUR to 1 EUR (an 80% decrease).
Now, let’s compare using Leverage:
With a multiplier/leverage of 20: A 10% price change results in a 100% profit.
With a multiplier/leverage of 10: The option change of 80% yields an 800% profit.
Options allow for significantly greater potential profit than traditional trading.
Conclusion: risks and rewards
Trading Options can offer many benefits, such as increasing your market exposure and providing higher leverage compared to other instruments like Share CFDs. However, they also come with significant risks due to leverage. Our platform offers risk management tools to help you manage these risks effectively.
Options may be a good choice if you're looking to speculate and achieve greater profits, but always remember the associated risks.