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What Factors Influence Options CFD Prices?

Date Modified: 26/07/2023

Option CFD prices are based on the price of market traded options. To understand how Option CFD prices are derived on the Plus500 platform, we need to investigate how traditional Options are priced and factors that can influence this.

How are Options Priced?

The value of Options in the traditional market depends on variables such as the underlying instrument price, Strike Price, volatility and time to expiration. Traders can then analyse these variables and execute their analysis into trading strategies with the objective of maximising profits.

CFD Options take factors straight from the underlying instrument, including the underlying instrument’s market price and Strike Price. They are also influenced by the same market movements as traditional Options. When trading CFD Options, the main objective is to speculate on the price of the underlying instrument, and decide whether the price will either rise or fall before the expiration date. Then the trader has the “option” to close the position to make a profit or loss (depending on the underlying market movement).

A word cloud of Options and related terms.

What Affects an Option’s Value

Here is a breakdown of how an Option’s Value can be influenced:

The Underlying Instrument Price: CFD Options follow the underlying option’s market movements. Market movements reflect largely on the supply and demand of the underlying instrument. This in turn influences how a Call or Put Option behaves. When the price of the underlying instrument rises, Call Options usually trend upwards in value. This means that Call Options CFD buyers could benefit from the rising price of the underlying instrument, however, could also incur a loss if the price falls. Whereas, Put Options usually trend downwards in value when the underlying instrument price rises, therefore, Put Option buyers may benefit from a falling market price.

However, if the speculation isn’t correct and the stock price moves in the opposite direction, the option might lose value and the position will close at a loss.

Strike Price: When determining an Option’s value, the Strike Price is arguably the most important variable. The Strike Price is the price the underlying instrument must reach before the Option expires. Strike Prices are predetermined and are fixed before the contract begins. The price between the underlying instrument and the Strike Price is what determines the Option’s value. Options CFDs are also available on a variety of Strike Prices, however they cannot be exercised.

Volatility: The effect of volatility on an Option’s price relies on a measure called Historical Volatility (also known as Statistical Volatility). As the name suggests, it examines past price movements of the underlying instrument over a certain time period. Experienced traders will use Option pricing models to estimate future volatility during this time period. To understand this concept, a trader may work the pricing model backwards and examine all other variables to calculate the prediction. In the traditional market, these include calculating interest rates, dividends and time value. When volatility occurs, Options tend to incur more value. Option CFD prices react when the underlying instrument experiences volatility. This can cause the Option CFD price to fluctuate more than the underlying instrument.

Implied Volatility is a key measure that allows traders to speculate what future volatility might be. Traders view the likelihood of future price changes by examining the underlying instrument’s volatility behaviour in the current time frame. Historical Volatility measures past market changes.

Time Value: Time Value has two variables (this is assuming there have been no changes to the underlying instrument price and volatility levels): (1) time until expiration and (2) how close the Strike Price is to the underlying instrument price. The longer it is until the expiry date, the more time the market has to hit the strike price. Time Value can be different depending on how close the Strike Price is to the underlying instrument

Time Decay measures the rate of decreased value of an Option as the expiration approaches. This is due to less time being available to make a profit. In the last month before expiration, Time Decay will increase.

Final Thoughts

There are several factors that influence an Option’s price. In the traditional market, the main variables include the underlying instrument price, Strike Price, volatility and duration to expiration. In the CFD market, Options CFDs are derived from the underlying instrument, except the trader does not have the right to exercise the Option. Instead, the trader can make a profit or loss from the difference in the opening and closing price of a position. It is worth considering all these variables when deciding to open an Options CFD position.

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Options FAQ

When you trade options you are speculating on the future price (strike price) of an underlying instrument such as a stock, index or commodity. Plus500 offers two types of options CFDs: Call option and Put option - you can Buy or Sell both types. If you enter a position on a Call/Put option, you are essentially entering a contract on the price an underlying instrument will reach (or surpass) at the expiry date.

Puts – A buyer/seller of a “Put Option” expects the price of the underlying instrument to fall/rise.

Calls – A buyer/seller of a “Call Option” expects the price of the underlying instrument to rise/fall.

For example, here is a breakdown of an option on Meta stock:

Call 125 | Nov | Meta

  • Call – The option type (can be either Call or Put).
  • 125 – The strike price, i.e. the price you assume the underlying instrument will surpass at the expiry date.
  • NOV (November 2018) – The option’s expiry date.

In CFD trading, a popular form of day trading, your profit (or loss) is determined by reference to the movement of an option price. You are not buying or selling the option itself.

Plus500 offers a range of Call/Put options CFDs. For a list of available options, click here.

Furthermore, to learn more about Options CFDs, check out our article on "What Is Options CFD Trading."

Trading on options has some important advantages:
You can experience higher volatility – percentage changes in options tend to be much more significant, meaning they can potentially deliver greater returns (along with greater risks).

It's possible to open larger positions with lower initial margin as options' prices are substantially cheaper than their underlying instruments. For example, Alphabet (GOOG) is viewed by some traders as an expensive stock, while the price of an Alphabet option can often be much more affordable - meaning you can buy more units for the same amount of initial capital.

You can diversify your positions by trading on various strike prices. A strike price is defined as the rate the underlying instrument needs to reach by the expiry time in order for the trade to be in profit. We offer multiple Put/Call options CFDs for each underlying instrument.

Plus500 only offers trading in options CFDs. These options CFDs give you an exposure to changes in option prices, they are cash settled and cannot be exercised by or against you or result in delivery of the underlying security. Therefore, when the option CFD reaches its expiry date, the position will be closed.

Plus500’s options CFDs allow you to amplify your market exposure without the need for a larger amount of capital. With a leverage of up to 1:5, for every $1,000 you deposit you can trade up to $5,000 worth of options. Accordingly, any potential profits or losses will be multiplied.

For example, presuming the stock price of Apple is $200, while the current price of a Call option CFD for $250 (Call 250 | Nov | Apple) is $12 per option. With $120, you could open a trading position on 10 options, valued at $600:

(10 Options x Option Price of $12) x Leverage of 5 = (10 x 12) x 5 = 600.

Every option has a predefined expiry date. Typically set for one month ahead. As opposed to regular options traded in the market, Option CFDs' expiry date is set a few days before that of the underlying options. This is due to very low trading activity on the related contract at this time.

On the date of expiry, the option CFD’s last price is based on the last available rate (and not zero).

The main factors determining the price of an option include: (a) the current price of the underlying instrument, (b) the level of volatility in the market, (c) the expiry date and (d) the option’s intrinsic value, defined as the value any given option would have if it were exercised at present time.

In addition, option prices are heavily influenced by their supply and demand in the market.

Prices of options CFDs are referenced to the price movements of the options. When financial markets experience high volatility, Options CFDs’ percentage change tends to move more significantly than the underlying stock or index, due to an increase in implied volatility.

Example 1: Alphabet (GOOG) is trading at $1,000, and you buy a Call option CFD of $1,100 for one month from now at $70. Two weeks later, Alphabet’s price goes up to $1,050, and the option CFD’s price is now $90. As such, your potential profit is 90-70 = $20 per option CFD. This is equivalent to a yield of 28% (20/70 = 0.28), which is much greater than if you would have bought an Alphabet share at $1,000, and profited 5% (50/1000 = 0.05).

Example 2: Alphabet (GOOG) is trading at $1,000, and you buy a Call option CFD of $1,100 for one month from now at $70. Two weeks later, Alphabet’s price goes down to $950, and the option CFD’s price is now $50. As such, your potential loss is 50-70 = -$20 per option CFD. Equivalent to a 28% change of in the price (20/70 = 0.28), as opposed to having bought an Alphabet share at $1,000, and lost 5% (50/1000 = 0.05).

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