SPREAD BETTING EXAMPLES
OPTIONS
When spread-betting on options, you can go Long and Short on both Calls and Puts. Please read the below examples to learn how this works and understand the associated risks.
OPTIONS EXAMPLE 1
LONG CALL
A call option gives the holder the right to buy an underlying asset at a certain price (called the strike) at a given point in the future. It is important to note that this is only a right and not an obligation and therefore would depend on whether the option has intrinsic value on the day of expiry as to whether the purchaser decided to enact it.
For example if you believe there is likely to be a rally in gold prices over the coming month, but were reluctant to hold a long futures position due to the downside risk, you could instead buy a spread bet on a call option for gold and limit your liability whilst still maintaining upside exposure. To do this you could buy a Gold Oct 1750 call option spread bet which has a price of 10.0 – 15.0, due to expire on the 24th Oct.
Suppose the underlying is trading at 1650 on 1st Sept, you could buy this option at 15.0 for £10 per point, giving you a worst case scenario of losing your entire premium if the option expires worthless (i.e. Gold is below 1750 on day of expiry). In this case you lose 150*10 = £1,500 (remembering that gold is traded per 0.1 point). To breakeven on this trade you would require the price of Gold on expiry to be the strike + the premium paid, 1750.0 + 15.0 = 1765.0. Any 0.1 point above this level would then generate you a profit of £10, with an unlimited maximum.
OPTIONS EXAMPLE 2
SHORT CALL
Going short or writing a call option gives the writer the chance to gain some income from static or falling markets. When going short the trader is taking the other side of a long call trade, therefore he has unlimited liability but only a limited gain. However, short options can be beneficial as either a hedge or part of a greater trading strategy as you could capitalise on the time and volatility premium attached to each option.
For example suppose you have an underlying long position in a share traded in the UK, for example Barclays. If you believe that in the short term the share price of Barclays was likely to fall or stay in a specific range, you could supplement your equity position by selling a call option and collecting the premium associated with it as the time decays away to its expiry. If Barclays was trading at 220p on April 1st you may decide to sell 10 lots of a 240p May Call option which could be trading at 6p, i.e. you have an exposure of short 10,000 shares. Assuming the stock was not above 240p on the day of expiry you could collect all 6p of the premium which would give you 10,000 x £0.06 = £600. You would then have either limited your loss or potentially made money in a market that would normally be bad for your underlying cash position.
It is important to remember that writing call options is a high risk strategy which can result in large capital loses and unlimited exposure. In the example above if Barclays had a good period during the time you were short the call options and rallied to 280p you would lose ((£2.40 - £2.80 + £0.06) x 10,000 = -£0.34 x 10,000 = -£3,400).
OPTIONS EXAMPLE 3
LONG PUT
A put option gives the holder the right to sell an underlying asset at a certain price (called the strike) at a given point in the future. It is important to note that this is only a right and not an obligation and therefore would depend on whether the option has intrinsic value on the day of expiry as to whether the purchaser decided to enact it.
For example if you believe there is likely to be a fall in the value of the UK 100 over the next two months but were worried about going short on the underlying index due to your potential unlimited liability, you could instead buy a spread bet on a put option for the UK 100 and limit your liability whilst still maintaining your full exposure to any fall in the index. To do this you could buy a UK 100 June 5400 put option spread bet which has a price of 40 – 44, due to expire on the third Friday in June.
Suppose the underlying is trading at 5460 in May, you could buy this option at 44 for £10 per point, giving you a worst case scenario of losing your entire premium if the option expires worthless (i.e. UK 100 is above 5400 on day of expiry). In this case you lose 44*10 = £440. To breakeven on this trade you would require the UK 100 on expiry to be the strike - the premium paid, 5400 - 44 = 5356. Any single point below this level would then generate you a profit of £10, with a maximum of 5356 x £10 if the index went to zero.
OPTIONS EXAMPLE 4
SHORT PUT
Going short or writing a put option gives the writer the chance to gain some income from static or rising markets. When going short the trader is taking the other side of a long put trade, therefore he will have a large liability but only a limited gain. However, short options can be used to hedge an underlying short position, in conjunction with a short call or simply as a standalone bet with the aim of gaining income.
For example if you believe there is likely to be low volatility or a rally in light crude prices in the next month you could sell an August $82.50 put when the underlying is at $84 in June. Imagine the price was $1.02 - $1.08, you could sell at $1.02 for $10 a point and if when it came to expiry Light Crude was still above $82.5 you would make a profit of 102 x $10 = $1020 (remembering that Light Crude is traded per 0.01).
However, if there were to be a crash in oil prices your potential exposure would be very large as every point below $82.5 – your premium of $1.02 ($81.48) would incur a loss of $10. For instance imagine light crude was at $81, you would lose ($82.50 -$81.00 - $1.02 = $0.48) * $10 = $480.
