Options Examples
'Buying' a Put
You believe that the FTSE® will fall steeply in the coming weeks and would like to place an options bet based on this view, risking no more than £1000.
The June FTSE® is currently at 5371 and the June 5200 Put is priced at 87 – 91. In this case you would 'buy' the option at 91 in £10/pt.
Your maximum risk on this trade is:
91 x £10 = £910
If, upon expiry in June, the FTSE® is higher than 5200, then the option expires with no value and you lose the full premium of £910.
If the FTSE® expires below the 5200 strike price in June then the option will be worth £10 for each point below 5200. Note that for the bet to make a profit overall the FTSE® will need to settle below your break-even level of 5109.
Your break-even level is:
5200 – 91 = 5109
If the FTSE® expires at 4950 then the option will expire with a value of 250, which is the difference between the strike price and the settlement level. Since you only paid 91 for the option you have made 159 points and will take a profit of £1590.
Your profit/loss is:
159 (points gained) x £10 (stake) = £1590 (profit)
Selling a Call
Being bearish on the market, you could decide to 'sell' a call. Please note that this is very different from buying options, in that the bet has no loss limit and there is as such greater risk involved.
However, one advantage of selling options is that it allows you to profit even if the market has no significant move in either direction.
The June FTSE® is trading at 5371 and the June 5500 Call is 79 – 83. You 'sell' the option at 79 in £10/pt. For this you receive a premium of £790. This is the maximum profit that you can make from this trade, but remember your losses have no cap.
Your maximum profit on this trade is:
79 x £10 = £790
If, upon expiry in June, the FTSE® is lower than 5500 then the option expires with no value and you receive the full premium of £790.
If the FTSE® expires above the 5500 strike price in June, however, then the option will cost you £10 for each point above 5500. Since you sold the option at 79, the FTSE® would need to settle below your break-even level of 5579 in order for you to make a profit.
Your break-even level is:
5500 + 79 = 5579
If the FTSE® expires at 5700 then the option will expire with a value of 200, which is the difference between the strike price and the settlement level. Since you only received 79 for the option you have lost 121 points, and will take a loss of £1210.
Your profit/loss is:
121 (points lost) x £10 (stake) = £1210 (loss)