All trading involves risk. Losses can exceed deposits.

Digital 100s and others guide

All trading involves risk. Losses can exceed deposits.

What is an option?

An option is a type of derivative that allows you to trade on the future value of an underlying market. It offers you the right, but not the obligation, to buy (a call option) or sell (a put option) a market in the future at a set price.

How options work

There are several factors that will impact the price of an option:

  • The level of the underlying market compared to the strike price
  • The time the option has left to expiry
  • The underlying volatility of the market

There are two types of options, puts and calls:

  • A put option is the right to sell an underlying instrument at a certain price
  • A call option is the right to buy an underlying instrument at a certain price

Call options

Call options - Spread betting

A call option is the right to buy an underlying instrument (for example the FTSE® 100) at a certain price, known as the 'strike'. For example, if you believe there will be a big move up on the FTSE® 100 before the end of the day (away from its current level), you could decide to 'buy' £10 per point of Daily FTSE® 5500 Call which has a price of 11-14.

What does this mean?

This means that you now hold the right, but not the obligation, to 'buy' £10 per point of the Daily FTSE® at a price of 5500. The option will be worthless if the FTSE® settles below 5500 at the end of the day, because if you exercised your right to 'buy' you would be paying more than the market is worth.

Potential profit and breaking even

For the right to 'buy' at 5500 you have paid a premium of 14, meaning the worst-case scenario is that you can lose £140 (14 x £10) should the option become worthless. To break even you need the FTSE® to reach 5514 (5500 (strike) + 14 (premium)). For every point that the FTSE® settles above 5514 you make £10 profit, with no maximum.

Call options - CFDs

A call option is the right to buy an underlying instrument (such as the FTSE® 100) at a certain price, known as the strike price. For example, you believe the FTSE® 100 will rise before the close of the market, from its current level of 5300. You can buy £10 per point of a Daily FTSE® 5300 Call which has a price of 11-14.

What does this mean?

You now hold the right, but not the obligation, to buy £10 per point of the FTSE® 100 at a price of 5300 rather than the level of the official settlement. For this right you bought the option at the offer price, 14. This means the worst-case scenario is that you can lose £140 (14 x £10 per point) if the option finishes without value. This would happen if the FTSE® 100 closes below 5300.

Potential profit and breaking even

For every point the FTSE® 100 settles above 5314 you make £10 per point. To break even you need the FTSE® 100 to reach 5314, calculated as 5300 (strike) + 14 (price paid for option).

Put options

Put options - spread betting

A put is the right to sell an underlying instrument at a certain price. So for example, you believe the FTSE® will have a large move, but this time you think it will be a move down. Therefore you 'buy' £10 per point of a 5500 put, currently priced at 13-16, buying yourself the right to 'sell' at a fixed price.

Put options - CFDs

A put option is very similar to a call, except it is a right to sell an underlying instrument at a certain price.

As in the example above, you might think the FTSE® 100 is set to move, but this time you think it will be a fall. Therefore you buy £10 per point of a 5300 put, currently priced at 13-16, buying yourself the right to sell at a fixed price.

Again, you can calculate your break-even point as 5300 (strike) - 16 (price) = 5284. You will make £10 for every point the FTSE® 100 falls below 5284. However, you will lose £160 (16 x £10 pounds per point) if the FTSE® 100 closes above 5300.

Daily or long-term

Daily options

Daily options are options that expire at the close of the underlying market on the day you place your trade. So if you trade a Daily FTSE® 100 option at 11.30 in the morning it will close at the official settlement of the FTSE 100 that afternoon.

Why daily options?

Daily options allow you to take a short-term view on the volatility of the underlying market, in addition to the directional movement. If you think the underlying market is going to move substantially on a particular day, you can potentially benefit irrespective of whether the market moves higher or lower.

Long-term options

We offer a range of long-term options including weekly, monthly and quarterly.

To see a full list of long-term options we offer, you can view our spread bet details or product details.

Market options

Stock index options

We offer a full range of options based on leading stock indices, including daily options and futures on the FTSE® 100 and Wall Street.

Forex options

Ideal for the short-term trader, our daily options are available on some of the most popular forex pairs.

Each trading day we offer a full range of call and put options on USD/JPY, EUR/USD, GBP/USD, USD/CHF and EUR/GBP. Options expire at 2pm Chicago time based on the spot rate.

As with our standard forex contracts, the quote is 'all-in', so there is no commission to pay.

Share options

Our share options give you exposure to changes in option prices, but cannot be exercised by or against you, and thus cannot result in delivery of actual shares.

We quote on a range of share options across the UK, US and European markets, including FTSE® 100 shares and a selection of leading US shares.