Options Spread Betting Basics

To understand the basics of options spread betting, one must first understand the concept of trading options. An option is the right to purchase or sell a contract at a particular price. The price is a fixed price, meaning unchanging, and the price is only good until the expiration date which is given in the option. The fixed price is also considered the strike price meaning at expiration this is where the security will end. An example of an option is the March FTSE is currently at 5300 and the strike price for December is 5550.

Traders may either place call or put options on a trade and this works the same in options spread betting. Traders would buy a call option if they predict the value of the asset would increase and buy a put option if the prediction is the value will decrease. In either of these situations, the maximum loss is limited because the trader is buying the option. The maximum loss is the option value times the wager size.

Selling call or put options works in the opposite manner. The profits are limited to the option value times the wager whilst the loss is potentially unlimited. When the market is declining, a trader would sell a call order to make a profit and vice versa in a rising market.

Since a trader knows the maximum loss potential in buying a call or put, this type of option spread betting is far less risky than selling a call or put option. This riskier aspect of options spread bet should be left to the more experienced trader.

As in other types of spread bets, options spread betting is not subjected to capital gains tax. Additionally, although an options spread bet has an expiration date a trader may close the bet prior to expiration if so desired. Another similarity is that the amount of gearing on a traditional spread bet is the same as on an option spread bet.

It is important when option spread betting to compare the different spreads offered by brokers as the price of their spreads can all be quite different. Occasionally one may have to phone a broker to ask for option spread bets as they aren't always available online.

Options spread betting is easily understood if one has a basic comprehension of options trading. Online there are a variety of examples of option spread betting so investors can see how buying or selling a put or call option can result in profits or losses. Reviewing these examples will be helpful in knowing how to spread bet on options.

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