Trading options with CFDs

Lesson 8 of 11

How to sell an option in the IG platform

As for bought options, when you sell options with IG we don’t actually sell assets on your behalf. You are speculating on the price of the option, where the price is the premium.

We’ll settle your position against the value of the option based on the settlement price of the underlying asset at the expiry point. This could mean an additional loss for you if the option doesn’t work out as you predicted. If the option expires worthless, you get to keep all of the premium.

Let’s see how this works in practice

Example

Suppose you wanted to sell an option on a stock index like the Germany 40.

As with buying, you can search for your market, view the options chain and select the details you want in our platform or app.

To bring up a deal ticket, select ‘sell’ for your desired option from the list.

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

What are the trading costs for a sell option?
When selling an option, you’ll incur a margin equal to the underlying deposit factor x size. Deposit factors are shown in our product details for each market.

It’s important to note that your maximum loss may be greater than this amount, and you may have to pay variation margin should your position go against you.

Your maximum profit is equal to the premium you receive, which is calculated like this:

Premium = size x option price (bid)

Your profit or loss is calculated as follows:

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

Example

Say the Germany 40 is currently trading at 11000. You think it will stay around this level and want to sell one contract (€5 lot size) of the June Germany 40 9000 Put priced at 50/55.

Your margin will be:

Stake size x deposit factor = €5 x (5% x 11000) = €2750

The premium you stand to receive is €5 x 50 = €250

If the Germany 40 settles above 8950, the option will be in profit. Anything below will result in a loss:

Breakeven (Put) = strike price - option price = 9000 - 50 = 8950

You hold the option to expiry, at which point the Germany 40 is at 10500.

Premium received = €250

Breakeven = 8950

Option closing price = 0

True profit/loss = -€5 x (0 - 50) = €250 profit

Because the Germany 40 price has settled above the strike price, the buyer won’t exercise the right to buy – so as the seller you keep the total premium received.

The margin you put down will also be released and available to place new trades.

Keep in mind that when selling a put option your potential loss is large, so it’s very important to understand the market before deciding to trade.

Closing your position and taking your profit
By monitoring your trade in the open positions screen, you can see the current price we’re making for that option.

You can choose to close your deal at any point against that 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 that point.

Homework

So, are you ready to put what you’ve learned to the test?

Log in to your demo trading account to try placing a sell option for yourself. Access options markets from the finder menu and scroll down the list of assets and maturities, or use the filters on the left to drill down to the asset class and maturity you’re 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. You can select for different maturities and see the price for each one.

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

You’ll see a deal ticket with details of the option you have selected – complete it, and you’re ready to practise selling your first option.

Lesson summary

  • Remember when you buy options with IG we don’t execute – you’re speculating on the option
  • When selling us an option you’ll incur margin equal to size x underlying deposit factor
  • Keep in mind that your losses can exceed your initial margin payment, and you may need to pay variation margin if the market moves against you
  • Your maximum profit is equal to the premium you receive
  • Options will be cash-settled at expiry, as defined by the price of the underlying asset at the expiry point
Lesson complete