Options are contracts that give the owner the right, but not the obligation, to either buy or sell an underlying asset at a predetermined price within a specified period of time. Options are derivatives, which means that their value is based on another financial instrument (the underlying asset, which could be a stock, commodity, index, or other).
The predetermined price is known as the strike price or exercise price and it’s the most important determinant of an option’s value. This is the price at which the underlying asset can be bought (for Call options) or sold (in case of Put options) when it is exercised.
The specified time during which the option can be exercised is its expiry, which is the final date on which the option is valid. The time left until expiry is referred to as “Time to Maturity.”
As with any other financial instrument, the price of an option is determined by supply and demand in the market. However, the market price of the option and its value are influenced by several factors:
Option CFDs are based on the price of an option and allow you to trade on the price changes of the option. There are Options CFDs for a wide range of underlying assets, strike prices and expiry dates, just like the options traded in the market. When closing your option CFD position, you will receive the difference between the current option price and the option price when the position is opened. On the Plus500 platform, only Option CFDS are available, and they are displayed in the following manner:
Their name includes:
Trading on options CFDs provides higher volatility. Options’ prices usually change more significantly than the ones in the underlying assets; therefore, they can yield higher profits, but also imply more risks.
Options CFDs also allow the opportunity to open larger positions with the same initial margin. This is because options' prices are significantly lower than those of the underlying instrument. For instance, a Call option may only cost a few dollars or even cents compared to the full price of buying a $100 stock.
Let’s say you buy 10 shares of Apple at $100 each, for a total of $1000. If the stock’s price climbs to $105 and you close the position, you will make a profit of $50.
If, on the other hand, you decide to buy the same $1000 worth of Apple 110 Call option CFDs, you can buy 3000 options at $0.325 each. Then, assuming that Apple’s share price reaches the same $105, the option's price might climb to $0.7. If you close the position then, your profit will be $1125 (0.7-0.325 = 0.375 x 3000 options = 1125).
So, with the same amount invested, options can yield more profits, but could equally incur greater losses.
As you can see, options provide you with more opportunities to trade a wide array of instruments with higher volatility.