Spread Bet Options are Wasting Assets

• A spread bet option only has a value for a fixed period of time, up until its expiry date
• It is therefore known as a 'wasting asset' because its value can decrease or waste away the closer it gets to its expiry

Using a very simplified example

• Vodafone shares are trading around £1.25 and you buy via a spread bet the Vodafone June £1.40 call for 20 points
• There are 40 days (including weekends) left till expiry
• If the price of Vodafone never really deviates from the £1.25 level the option will lose 0.5 point every day till expiry, finally expiring worthless

Contrast this to another spread betting client who was also bullish on Vodafone, but instead of buying the call option he went long Vodafone using a traditional spread bet at £1.25. If after 40 days the price of Vodafone was still £1.25 he would show neither profit nor loss.

This is why they call an option a wasting asset because if the stock price is static or trades within a tight range the value of the options, puts and calls, will lose value.

The Flip Side - Shorting Spread Bet Options

You can also easily short spread bet options, so what is a disadvantage to a buyer of options (wasting asset), turns out to be an advantage to the short seller. For an introduction to short selling click here.

Using the above example, if a spread betting client had sold short the Vodafone call option at 20 points and Vodafone either went nowhere or even traded higher but didn't stand above £1.40 on the day of expiry, then the option would expire at zero giving the short seller a profit of 20 points multiplied by his stake (pounds per point).

However an option short seller can never make more money than the price that the option was sold at because the value can't trade below zero. But to the short seller risks are theoretically unlimited and they can accrue very fast due to the subtle gearing that is a characteristic of option.

Spread Bet Options Are Flexible

• All spread bet options are 100% tradable just like traditional spread bets
• Buyers and sellers are not locked into a contract until the expiry date
• You can buy or short an option one minute, before liquidating the trade the next minute, or you can keep the position open for many months etc

Summary

Options can be tricky, this is why we state that education is paramount. Go to the LearnMoney section on Traded Options if you need more help. Alternatively it's a very good idea to start trading in small size when first dealing in options.

A lot of money is lost in the markets by people not fully understanding with what they're doing or exactly how the products they're trading in work. Make sure you're not one of these.