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How to Use Options CFDs for Speculation and Hedging
What is Speculation?
A speculator is generally a trader who is looking for a significant gain in a short period of time. An investor on the other hand is one who intends to make a profit in the long term, when the asset is expected to move in a certain direction, but over a longer period of time.
How to Speculate with Options CFDs
Speculators generally try to make an educated guess about the direction of their trades over a short period of time.
Here is an example of where Options CFDs come in:
A speculator believes Apple will beat expectations at its earnings announcement in the next couple of days. They buy a call option with a Strike Price at, or just above the current share price. When stronger earnings are announced, the share price rises significantly which also sends the price of the Call option higher. This speculation is correct and the trader can close the position and profit by selling the Call Option at a higher price.
In contrast, if the speculator believes that the price will decrease in value, a Put Option can be purchased. If this speculation is accurate and the underlying instrument’s price falls, the speculator can sell the Put Option at a higher 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.
What is Hedging?
When traders decide to hedge, they do so in an attempt to protect their portfolio from adverse price movements and to try to protect themselves from potential losses. For example, this could be done by purchasing a Put Option as a hedge against an underlying long portfolio position.
How to Hedge With Options CFDs*
You can hedge with any underlying instrument, but it takes research and experience to know when hedging could be beneficial. Here is an example of a hedge with Options CFDs:
Let’s say Sarah had a long position in oil. She believed that in the long term, the price of oil would continue to trend higher; however, she was a little concerned that there could be some short term falls due to current global conditions. Therefore, to counteract the potential loss, she could have bought a Put Option CFD on oil (a derivative) which would have gained in value if the oil price fell - thus offsetting part of the loss incurred by holding a buy position on oil.
*Please remember that hedging on the Plus500 platform can only be carried out if it is not conducted in breach of the terms of the User Agreement on your own account.
A speculator attempts to predict price movements on an underlying instrument in a short period of time while taking advantage of leverage. Speculating on Options CFDs can be a great way to trade for those seeking quick returns but also understand there is greater potential for loss. Also, Options CFDs can be a great way to hedge a portfolio to attempt to mitigate potential loss.