Options when spread betting can be an exciting derivative product with built-in risk management, strategies bespoke to options and implied volatility that can spike your options price higher than the underlying market. Find out how you can take advantage of options with spread betting, combining the benefits of both derivative products.
The Basics of Options Trading
Options are derivative product that gives you the right, but not the obligation, to buy or sell an asset at an agreed price (called a strike price) on or before a specific date. Options contracts differ depending on the derivative product your are buying or selling – 100 units represent a contract for shares while each forex option contract consists of one lot ($100,000).
Compared to spread bets and CFDs, options provide you with more ways to profit from the underlying market:
When you buy an option, you’ll pay a premium to take out the option, allowing you to benefit from future market movements in your favour. Buying options are best used when the markets are volatile, as the likelihood of the option being worth something is higher. When you purchase an option, you have limited downside (your premium paid) and unlimited profit potential.
You will buy a call option when you think the underlying market will rise before a specific date. If the underlying asset falls, you’ll lose the premium you paid, while if the market rises above the strike price, you can have unlimited profit potential.
A put option is the opposite of the call option, and you’ll use this option when you believe an asset will continue to fall.
In selling options, you write the contract to another trader and collect the premium. Selling options is useful if the markets are trading in a range or are falling, as you can collect the premiums in low-volatility markets. When you sell options, you have unlimited downside and limited upside (your maximum profit is limited to your premium).
If you sell a call option, your view is that the markets will not go higher than the strike price; this allows you to collect the premium from a bettor who purchases the Call option. If the option expires below the strike price, you keep the premium. If the option rises above the strike price, you’ll owe the call option bettor money.
Selling a put option is when you think the markets will not go lower than the current strike price. By selling the put, you collect the premium and wait until the option expires to either walk away with the premium as profit or end up owing the bettor who purchased the put contract off you.
Learn How to Spread Bet Options
Spread betting options work in the same way as spread betting any other financial asset, they allow you to bet on the direction of the option price. The difference is that options have implied volatility (IV), essentially a percentage indicating how much the market thinks the underlying asset will move. This can affect the price of the options significantly.
If the option has a high IV, the more expensive the options are because these options are likely to expire profitably, giving the buyer a better chance to profit. This allows you to profit from the option price rising, which can be much higher than the movement of the underlying asset.
Let’s say you have a call option for the FTSE 100 7500 Oct 23 contract priced at £80, and you want to stake £1 per point. The current price is 7490, so for the contract to be profitable it needs to finish higher than 7500 by the end of October 2023. The following week, the UK established better than expected GDP, which caused the FTSE 100 to rally 200 points, taking it to 7690 (now placing the option in the money).
If you had bought a CFD you would have made £200 profit (£1 x 200 point move). Because you held a call option and with implied volatility, the FTSE 100 7500 Oct 23 option has gone from £80 to £450, meaning you have made a profit of £370 or £170 more than using the CFD.
Now you have two options: sell the option and collect the £370 profit generated. Or you can hold the option longer with the idea that the FTSE:
A) stays above the 7500 strike price
B) rallies higher.
If you decide to hold the option until expiration, you’ll have the right to buy the FTSE 100 at 7500 and then sell the asset at whatever price the FTSE 100 is trading at the option’s expiration.
For example, if the FTSE 100 price is at 7700, you’ll be able to collect £220 minus the cost of the call option which was £80. The call option gave you the right to buy FTSE 100 at 7500, and then you can sell it for 7700, netting you a £140 profit.
Equally, if the market went below 7500 the option would expire worthless, and you would lose your premium (£80).
The Best Options Spread Betting Brokers
1. Pepperstone – Best MT4 Spread Betting Broker
Pepperstone is our highest-rated spread betting broker thanks to its fast execution speeds (which we have tested and found to be one of the best), low trading costs, and range of spread betting trading platforms.
Platforms available includes MetaTrader 4, MetaTrader 5, cTrader and TradingView. If using MetaTrader 4, Pepperstone provides you with extra tools like Capitalise.ai (a no-code tool to automate your bets) and the Smart Trader Tools plugin. This plugin consists of useful indicators and other trading features to help better your trading experience with their 62 forex pairs, 25 commodities, 1000+ stocks and 28 indices.
Pairing useful analytical tools with Pepperstone’s services makes an excellent betting environment, especially if you want to automate your spread bets.
2. Capital.com – Best Mobile App Spread Betting Broker
We rated Capital.com for their excellent custom developed mobile app which comes with advanced charting tools such as 70+ indicators (one of the most available on a mobile app). Another feature we liked is that the mobile app has an auto-generated smartfeed feature that aggregates all the latest market developments into one feed. Should you prefer to use desktop or web browser then then Capital.com desktop, MT4 and TradingView are other options.
While you can’t trade options, 3500+ products are available with Capital.com include 2771 shares, 20 indices, 19 commodities and an impressive 125 forex pairs which start from 0.6 pips. If you need to bet on the move or only have a mobile device to trade on, then Capital.com is our top pick.
3. IG Group – Best Options Spread Betting Broker
IG is our top pick if you want to spread bet options. IG Group (which actually created the spread betting concept) offers 30+ options markets you can bet that include indices, shares, forex and commodities, and a range of different expirations from daily to quarterly. You are not limited to options, you can also spread bet on their straight derivative and this even extends to unique products like IPOs, bonds, and thematic baskets and interest rates.
When betting with the IG Group, you can choose from 4 trading platforms – IG trading platform, ProRealTime and MetaTrader 4 (MT4). IG Trading platform which is available as desktop, web and mobile comes with a guaranteed stop loss and excellent analytical tools. ProRealTime is our choice for chart trading and also has automation capability while MT4. which does most things well and has Expert Advisor for automation and customisation.
4. City Index – Great Spread Betting With GLSO
If you want a broker with an enhanced risk management set-up, then City Index is our first choice. The City Index WebTrader provides decent tools to track your performance such as Smart Signals and Performance Analytics to give you real-time feedback, essential for bettors looking to improve. In addition, City Index provides guaranteed stop-loss orders which is excellent at protecting your stop-losses from slippage.
Over 6,300 global markets are available to bet an impressive 84 forex pairs, which is more than most brokers offer.
5. FXCM – Good Spread Betting With TradingView
If you like all the advanced charting features TradingView has and want to spread bet through it, then FXCM is ideal for you. Not only can you bet on FXCM’s decent range of products on TradingView, but you’ll also benefit from its competitive spreads and fast execution speeds. Other platforms available include Trading Station, Capitalise.ai and MT4, all which have automation capabilities.
6. Spreadex – Top Spread Betting Platform For Sports and Financial Spread Bets
If you want to spread bet on both sports and financial markets, then Spreadex is one of the best. We like SpreadEx’s proprietary spread betting platform with many top features that can help analyse the markets. For example, its platform offers pattern recognition tools to help you find new trade ideas, automated pro trend lines and price history going back ten years. The platform also has a guaranteed stop loss order and trading directly via charts.
Spreadex signup takes just a few minutes and its community of 60,000 can trade 57 Forex pairs as spot and 12 as futures Betters can also bet using 16 indices, 200+ ETFs, Gold and Silver metals, energies amd 1000+ shares. Spread when betting on Forex starts from 0.6 pips.
7. OANDA – Best For Beginner Spread Bet Trading
OANDA Trade is an excellent spread betting platform and has a number of too that make it a good choice for beginners. Features you will appreciate include its interface that many find to be very user friendly, low stake sizes (so you don’t have to take larger position than you wish to and a guaranteed stop loss order. One other feature, worth mentioning it its partnership with TradingView to being your some of the best charts available in the industry. All these features combine to make the transition from a demo account to a live account seamless.
Other platforms available other than OANDA Trade to be on their 70 Forex pairs and Gold and Silver vs 10 different fiats, commodities and indices include MetaTrader 4 and TradingView.
8. ThinkMarkets – Best For Automated Spread Betting With MT5
ThinkMarkets allows you to spread bet on the MetaTrader 5 platform or MetaTrader 4 and has low spreads, with a free VPS service available. Combining these creates an ideal spread betting environment to automate your bets.
What Are The Advantages Of Option Spead Betting?
Take Advantage Of Options Volatility
Unlike traditional spread betting, options can spike in price when better-than-expected data is released (they can also plunge when data is worse). Because you spread bet the options price and not the underlying asset like the EURUSD, you can benefit from this surge, potentially earning more than the actual movement from the asset.
Built-In Risk Management
One thing I like about betting on options is that you don’t have to worry about your risk management. If you buy a call or put option, you will have to pay a premium; this premium is the maximum you will lose, allowing you to manage your risk easily. This allows you to stay in a “losing” trade until expiration and always lose the maximum, which is your premium, no matter how wrong you got your decision. This also gives the asset a chance to rebound and go in your favour potentially. Of course, you can always close out your spread bet on the option before expiration.
Tax-Free On Profits
With all spread betting products you can reduce your trading costs because spread betting is tax-exempt in the UK and Ireland, making it an attractive method to trade the markets.
Develop Unique Strategies To Profit From Options
Spread betting on options also allows you to create specific strategies that can help in different market events, lock in profits if the markets don’t move, collect premiums from other options traders, and more. Below, I’ll share an example of a spread betting options strategy:
This is a strategy where you spread bet on a call and put an option with the same strike price and expiration date of the underlying asset. The idea behind the straddle is that you can profit if the asset has a large movement up or down, but you’ll lose both premiums if the asset doesn’t move. Straddles are ideal around high-impacting news such as the NFP, where the EUR/USD can quickly surge upwards on positive data (or plunge on bad news).
This is just one of many ways to use options to hedge, lock in and profit from markets rising, falling, or barely moving.
What Are The Disadvantages Of Option Spread Betting
Cannot Write Your Own Options
Options provided by spread betting companies are given at preset levels, so you cannot be granular with how to spread bet on options. The brokers offer prices in 20-point intervals, which I dislike.
Like other markets, you also pay the spread to enter the option spread bet, but the spread is somewhat wide (around five points+) depending on which option you are betting on.
Complicated Trading Product
Options trading isn’t easy to understand because there are several methods (buy/sell call option or buy/sell put option) of opening a contract, making it harder to learn and easier to make a mistake.
Limited Choice Of Brokers
If you want to spread bet on options, then you are at the mercy of a limited number of brokers offering options to spread bet on.
How to Get Started Spread Betting
Once you’ve learned how to trade and developed a trading strategy you are confident in, the next step is to start spread betting. Before you start spread betting, you will need a live account with a broker that suits your needs. Ideal brokers usually have a solid choice of spread betting platforms, a good variety of markets to spread bet on, and low spreads that make spread betting cost-effective.
Spread Betting Trading Strategies
You should have an effective spread betting strategy that can generate trading ideas and help instil discipline in your trading. You can use various methods to find new trading ideas in spread betting, the most common are:
This strategy uses price action like support and resistance levels or chart patterns to find areas of the markets that may go higher if looking for a long opportunity or lower if looking for a short.
The idea is if the markets have consolidated and failed to trade higher than the previous highs, it will eventually have the potential to trade higher, causing a breakout and a new move higher.
Using Technical Indicators
Another common strategy is built using technical indicators based on your preferences. A whole range of indicators is available for you to use to find trading ideas. What attracts spread bettors to technical indicators is that they can automatically use these tools to identify opportunities.
For example, a common strategy would be using the 20 and 50 moving averages and then waiting for the 20 moving averages to cross above the 50 moving averages giving a buy signal.
Scalping is a way of spread betting by combining price action trading and indicators to identify small and quick trading opportunities. The idea behind scalping is to be in a trade for a few minutes, hoping to capture a significant move. Scalping is possible thanks to the use of leverage.
Spread Betting Market Guide
Spread betting is a derivative that allows you to speculate on the price movements of the most popular markets without owning the underlying asset. It acts similarly to trading CFDs, except you will place bets in GBP only, so you are not exposed to currency market risk or exchange fees.
The main appeal of spread betting is that it offers a tax-free alternative to CFD trading and other traditional investments that must pay stamp duty and capital gains tax. While spread betting, you are exempt from capital gains and stamp duty tax, reducing your tax liabilities and trading costs.
Financial Market Risk
As with all methods of speculating, there is a financial risk of losing your capital if the financial markets fall. Spread betting is a derivative product and, therefore, can be used to benefit from a rising or falling market by going long or short. However, this means that you can also suffer the risk of a financial market rising if you are short with a spread bet.