What Are Options?

• A spread bet option is a hard vehicle to define properly
• In most cases it is simply a spread market on an underlying exchange based option contract
• For example, on the LIFFE market they trade options on Vodafone, so a spread bet option is priced on the back of the LIFFE option's price

However, if you understand what options are and how they work in the financial markets then you will understand spread bet options. There is one major difference though, spread bet options are always settled for cash.

Spread Bet Options - Education is a MUST

Options and spread bet options are on the surface not that hard to understand. However when first introduced to them bear in mind that they are actually quite complex beasts. With a traditional spread bet you can theoretically understand them, their pricing, and how to use them in a matter of hours, not with options though.

For example, if you buy the FTSE 100 spread bet and the index moves higher then you will be 100% guaranteed to make money. There can be no questions about this. But if you position yourself long the FTSE 100 using options and the index rises, then it is possible that the trade can lose money. This is not to say that options are bad trading vehicles, on the contrary, but there is more to them and their application than meets the eye.

If you want to get a sound introduction on options then it is strongly advised that you look at the LearnMoney section on Traded Options by clicking here. This will give you some firm foundations.

Also, be aware that someone may for example be a skilled practitioner in spread bets or trading in general, but this doesn't always translate into getting profitable results when trading options. Some argue with authority that spread bets and spread bet options are different products with wholly different characteristics.

Difference Between Exchange Based & Spread Bet Options

The definition of a stock call option traded on LIFFE

• A call option gives the buyer the right, but not the obligation, to buy a fixed number of shares of the underlying stock at a fixed price within a fixed period of time
• For example: Reuters Jun £2.00 call - The buyer has the right, but not the obligation, to buy 1,000 Reuters shares at £2.00 on or before the expiry in June

But with the spread bet option all you're doing is speculating on the price of the said option. Assume that the spread bet quote was 35-40 points for the Reuters example above.

If the long spread bet option position was subsequently sold for 60 points, then the profit would be 60-40 = 20 points or £100 pounds.