CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Trading options with CFDs

Lesson 6 of 11

How to buy an option in the IG platform

When you buy options with IG you’re speculating on the price of the option, where the price is the premium.

You can’t exercise an option with us. Instead you can close your deal at any point against the current price we’re making for that option. Alternatively, you can leave the option to expiry, and your position will be settled against the value defined by the price of the underlying asset at the expiry point.

Let’s see how this works in practice.

Example

Suppose you want to open an option trade on a stock index like the US (S&P) 500.

You can use our web platform or mobile apps. Access options markets from the finder menu and scroll down the list of assets and maturities, or use the filters on the left to narrow your search.

You can drill down to the asset class and maturity you are interested in.

You’ll see the options chain: a list of strikes, prices for both puts and calls, along with the implied volatility (IV) value. This is a measure of how volatile the underlying asset is. The higher the IV value, the more likely it is that the underlying price will change dramatically.

You can select different maturities and see the price for each one.

To bring up a deal ticket, select ‘buy’.

You’ll see a deal ticket containing fields much like the following – the figures are as an example only.

Another example: let’s say the US 500 is trading at 4550. You decide to buy a US 500 4500 put option priced at 58/60. The premium for this option is 60. You choose to buy half a contract ($100 lot size), so buying one option costs you $3,000.

When buying an option, the total cost is equal to the premium paid. A spread – the difference between the bid and ask prices – is incorporated into your $3,000 premium.

If the US 500 moves below 4500 before expiry, your option has intrinsic value and is said to be ‘in the money’. If it expires above 4500 – the breakeven point – you’ve made your premium back and are in profit. The profit potential is unlimited, and depends on how far the underlying moves above the strike price.

If the US 500 moves in your favour and your option’s time value is high, or if volatility increases sufficiently, you can also close your position early to take profit. You can monitor your trade in the open positions screen, and see the current price we are making for that option at any time.

Final profit/loss is calculated in the following way:

Profit/loss = size x (option closing price - option opening price)

Keep in mind that your loss is limited to your premium, though – even if the above calculation gives you a higher figure.

Underlying closing price - option opening price

If the US 500 expires at 4600 4500 – 4600 = - 100 You’re out of the money – you will have lost your $3,000 premium

If the option expires at 4500

4500 - 4500 = 0 You’re at the money – but you won’t have covered your premium, so you lose $3,000
If the option expires at 4440 4500 - 4440 = 60 Breakeven point. You cover your premium
If the option expires at 4440 4500 - 4400 = 100 You cover your premium and are in profit by 40 pts. This equates to a profit of $2,000 (40 x $50).

Closing your position and taking your profit
You can choose to close your deal at any point against the current price, or leave the option to expiry.

At expiry your position will be settled against the value of the option as defined by the price of the underlying at the expiry point.

What is the maximum risk?
When buying an option the maximum risk is equal to the premium paid. This is calculated as trade size x price.

So, in this example, it would mean buying half a contract (lot size = $100), paying a premium of $3,000 to open your position – the maximum you can lose if your option expires with no value.

Buying options is limited risk, with a potentially uncapped maximum profit

Homework

Log into your demo account to see how today’s US 500 options compare with the example shown here.

Ready to put what you’ve learned to the test? Why not use your demo account to try buying an option for yourself.

Lesson summary

  • Remember, when you buy options with IG you don’t physically own the option – you are speculating on the option’s price
  • You can choose to close your deal at any point against the current price we are making for that option, or simply leave the option to expiry
  • When you buy a CFD option we will hold the full premium in reserve as margin
  • Options will be cash settled at expiry, as defined by the settlement process of the underlying asset at the expiry point
Lesson complete