Leading CFD and spread betting provider IG Group has launched another range of products aimed at retail traders and spread bettors in the shape of what it calls daily options trading. These new contracts will be available as margin trades or spread bets and will be offered over a range of leading currencies, equity indices and commodities. They are being pitched by IG as an alternative to daily trades and bets on the equivalent cash markets.
As was the case with the recent launch in Europe, by IG, of Turbo 24 warrants, the options will be available as put or calls, but unlike the Turbo 24warrants, clients will able to go long or short of the daily options.
As readers may already be aware buying Call options confers right the right but not the obligation to purchase an instrument at a pre-agreed strike price, whilst buying Put options confers the right but not the obligation to sell an instrument at the pre-agreed strike price.
Selling options, of course, obligates the seller to either sell or purchase the underlying instrument, that the option is over, as and when they are called on to do so
The IG daily options are cash-settled so there will be no delivery issues. However, being short of options has a very different risk profile to being long and prospective traders should ensure that they fully understand the risks and mechanics of options trading before jumping in.
As the name implies the daily options have limited life span of a maximum of 24 hours before expiry. In other words, it’s likely that there will be very little time value, if any, in the options pricing formula.
Rather the valuation will depend on the option’s strike price and its position relative to the price of the underlying instrument, that is whether it is in or out of the money
Call options are in the money when the price of the underlying instrument is higher than the strike price of the option. Whilst Put options are in the money when the price of the underlying instrument is below the strike price of the option.
The prices of out of the money options tend to be more sensitive or geared towards changes in the price of the underlying instrument, that sensitivity is known as the options delta
However, by virtue of being out of the money i.e. away from the current price, these options have a lower likelihood of expiring with any value.
Given the very short-term nature of daily options trading, this is clearly, an important consideration, as they have a maximum time frame of twenty-four hours to move into the money.
Being long options is a way of gaining leveraged exposure to a market or instrument with a known and finite risk from the outset, i.e. the option premium, that is the price paid for the options contract.
That said traders should be aware that most options, somewhere between 70% and 75% will expire worthless and that those options premiums will be lost
Option sellers look to benefit from those market dynamics but are rarely outright short, instead, they use sophisticated hedging techniques to limit their exposure and risk profiles.
These new options are another example of interesting product innovation from IG and once again this has increased the number of trading choices and strategies available to retail traders and spread bettors.
However, given their short-term nature daily options will not be for everyone and traders should be very clear about what outcomes they want to achieve by using short term products such as these.
As with all derivatives if they are used sensibly by traders to spread risk, rather than to concentrate it, then their introduction is to be welcomed.
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