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What is Options CFD Trading?
Date Modified: 26/07/2023
Put simply, in the traditional trading market (not the CFD market) an Option is a contract where the seller gives the right, but not the obligation, to the buyer to buy or sell an underlying instrument such as a stock, commodity, index, forex pair or another asset. This comes with a predetermined price (the strike price) that the underlying instrument needs to reach before an expiry date. In the CFD market, rather than actually owning any options, the buyer/seller has the opportunity to speculate on the price difference of the opening and closing of the Option. When the Option CFD expires, the position is closed at the last available rate.
How do Options CFDs Work?
To understand Options CFDs, we must explore the basic fundamentals. Options CFD features follow traditional Option’s features in how the components are built. These include the following:
The Underlying Instrument: This is the name of the instrument on which the option is based. Options CFDs are based on this and the components are derived from here.
Call and Put: In a very broad sense, the two main types of Options are Calls and Puts. In the CFD market, the buyer of a Call Option speculates that the price will rise. The buyer of a Put Option speculates the price will fall. The Option CFD holder does not have the right to buy or sell, but will either profit or incur a loss from the difference in the opening and closing price.
The Strike Price: The strike price is the price of the underlying instrument on which the contract is set. E.g “Apple | Call 300 | Jul” is a contract based on the price of Apple being above, or below, $300 when it expires in July. In this case, the Strike Price is $300. A buyer of this contract expects the price of Apple shares to be above $300 when it expires.
Expiry Date: Every Option contract comes with an expiry date. If the rate of the underlying instrument does not reach the Strike Price before this date, the Option will expire with little, or no value. Also, the longer time duration an Option has, the more chance the market will move in the holder’s favour: in other words, the closer the contract gets to the expiration date, the less the time value of the option. Options CFDs are affected by time value in the same way as the underlying instrument. The Plus500 trading platform will close your Options CFD position automatically at the expiry date, if not closed earlier by you.
Some of the factors that influence the value of Options CFDs on the Plus500 platform are:
- The current price of the underlying instrument.
- Amount of volatility in the market.
- Expiry date (the longer it is until the expiry date, the more time the market has to hit the strike price).
- Supply and demand in the underlying market for the specific Option.
*Please check the expiry date in the Instrument’s details section, as Plus500’s expiry day may differ from the expiry on the Exchange. The expiry date for Options CFDs on the Plus500 platform is typically set a few days before that of the traditional Options on the underlying market.
Why Should I Trade with Options CFDs?
Trading with Options CFDs generally offers greater exposure than trading other instruments, such as Share CFDs. This means you can open larger positions with less capital. For example, with a leverage of up to 1:5, for every $1,000 you deposit, you can trade up to $5,000 worth of Options CFDs. It is important to remember that while trading with leverage can magnify profits, it can also increase losses.
Traders on the Plus500 CFD platform have the added benefit of using risk management tools such as Stop Loss, Limit Stop, Guaranteed Stop etc. to help prevent losses.
Plus500 does not charge commission on any Options CFDs offered on the platform.
Final Thoughts
Trading Options CFDs may bring many benefits. These include increasing your market exposure as Options CFDs offer more leverage than other underlying instruments such as Shares CFDs. There are no commissions on Plus500 Options CFDs and are settled by the difference of the opening and closing price. The Plus500 platform offers risk management tools that can help you mitigate the risk of potential losses. Although trading Options CFDs has its advantages, there are significant risks involved as well, because they are traded with leverage. With all this in mind, if you are looking to speculate or hedge your exposure then CFD Options may be something you can consider.
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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).