Contract for Difference Trading on the Premium of Derivatives (Vanilla Option) Price

What is Contract For Difference?

Contract for difference (CFD) allows investors to invest in a financial asset without buying/selling the actual asset.

CFD on Vanilla Options allows investors to invest in a Vanilla Option without buying or selling the actual Vanilla Option. Meaning that investors can trade on the quotes of these premiums, and earn/lose according to the change in the value of the underlying options, without having to actually own the actual option.

What is a Vanilla Option?

Vanilla Options enable traders the right to buy or sell financial instruments at a specific price in a specific time.

Vanilla option background:

  • Vanilla Option is a financial instrument from a group of financial instruments called derivatives.
  • Derivative means that the financial instrument derives its value from another financial instrument.
  • That’s why every Vanilla Option is linked to another instrument from which it derives its value i.e. the underlying asset.
  • The underlying asset can be any asset, but we’ll focus on stocks (Facebook, Alphabet etc.) and indices (S&P500, DAX, CAC, FTSE).

Basic terms for CFD on Vanilla Options

  1. Call Option

Investors have the right to buy the asset at a specific price, from a range of call prices. Call options are usually bought by traders who predict that the underlying asset will go up in the designated time frame of the option.

  1. Put Option

Investors have the right to sell the asset at a specific price, from a range of put prices. Put options are usually bought by traders who predict that the underlying asset will go down in a designated time frame of the option.

CFD Vanilla Option terms for Call Option

In the Money: When the asset market price is higher than the strike price.

At The Money: When the market price of the asset stays the same in the expiry time.

Out of The Money: At the expiry time the asset market price is lower than the strike price.

Other basic terms

  1. Value of Option (Premium/margin) – The cost of the option

These Premiums are the values of various options linked to an underlying asset. Investors can trade on the quotes of these premiums and earn/lose according to the change in the value of the underlying options, without having to actually own the option.

CFD’s on Options offer investors a simple way to access the Options market price action, while depositing only a fraction of the premium cost (due to the leverage), and still gain full option price exposure.

Note: The Option itself has the same value of the underlying asset; the option is a CFD.

  1. Strike Price

The fixed price for securities or a new stock market issue; the price at which a put or call option can be exercised.

For example:

Symbol Type Symbol
CFD on Vanilla Option Amazon | Feb | Call 1500
CFD on Vanilla Option Amazon | Feb | Call 1590
CFD on Vanilla Option Amazon | Feb | Call 1670
CFD on Vanilla Option Amazon | Feb | Call 1750
CFD on Vanilla Option Amazon | Feb | Call 1840
CFD on Vanilla Option Amazon | Feb | Put 1500
CFD on Vanilla Option Amazon | Feb | Put 1590
CFD on Vanilla Option Amazon | Feb | Put 1670
CFD on Vanilla Option Amazon | Feb | Put 1750
CFD on Vanilla Option Amazon | Feb | Put 1840

 

Which factors affect the cost of an Option (the Premium)? 

  • The gap between the strike price and current price of the underlying asset
  • The time until the option is expired
  • The volatility of the underlying asset

For example: Amazon Market Price: $1,650

Instrument Market Price Option type Description Option price at expiration if stock price is $1500 Option price at expiration if stock price is $1650 Option price at expiration if stock price is $1800
Amazon Feb  Call 1500 $180 Deep in the money option price will go up with higher sensitivity and correlation to the stock price increasing 0 150 300
Amazon Feb  Put 1500 $20 Out of the money option price will go up with low sensitivity and correlation to the stock price decreasing 0 0 0
Amazon Feb Call 1650 $70 At the money option price will go up with medium sensitivity and correlation to the stock price increasing 0 0 150
Amazon Feb  Put 1650 $70 At the money option price will go up with medium sensitivity and correlation to the stock price decreasing 150 0 0
Amazon Feb  Call 1800 $10 Out of the money option price will go up with low sensitivity and correlation to the stock price increasing 0 0 0
Amazon Feb  Put 1800 $200 Deep in the money option price will go up with higher sensitivity and correlation to the stock price decreasing 300 150 0

 

Example for buying Call Option

Profit $4                                                              $80

Buy a “Call” option (strike price is $75)        $75

Trading at $70 profit                                        $70

 Value (premium): $1     Strike price:   $75

 

Example for Buying a Put Option

Trading at $80                                                    $80

Buy a “Put” option (strike price is $75)         $75

$4 profit                                                               $70

 Value (premium): $1     Strike price:    $75

 

The advantages of trading CFD on Vanilla Options

  • Traders can choose from a range of Strike Prices
  • Traders can close the position in any given time, before the expiration date
  • There is a build-in leverage which is higher than other CFDs products i.e. 1:5 leverage

Trading Vanilla Options

  • It’s a popular tool for hedging
  • Unlimited potential profit with limited loss
  • No RO Fees

In Summary

CFD allows investors to invest in a financial asset without buying/selling the actual asset itself. CFD on Vanilla Options allows investors to invest in a Vanilla Option without buying or selling the actual Vanilla Option, so they can trade on the quotes of these premiums, and earn/lose according to the change in the value of the underlying options, without having to actually own the actual option. Vanilla Options enable traders the right to buy or sell financial instruments at a specific price in a specific time.