As a result of the ever growing demand for financial spread betting, a wealth of alternative bases for trading have sprung up aside from straightforward market bets. One of the most heavily traded of these alternatives has been the options spread bet, which allows traders to access options on underlying assets, trading on the pricing of these instruments rather than the assets to which they relate.
Of course, options (as a derivative instrument) are directly correlative in pricing terms to the relevant underlying asset, but behave in slightly different ways to reflect their value to the holder, thus providing an often more volatile environment for financial spread betting.
What Are Options?
Options are, as the name suggests, options to trade in an underlying asset at a future date. They are distinct from obligations in that traders can choose whether or not to execute their options, thus the option itself is basically a right to acquire some end asset. Options are everlasting and so can be exercised at any future point at the set price stipulated at the time of purchase, giving traders who invest in options the potential to significantly leverage their gains.
For those on a more limited budget or concerned about the potential for hefty capital gains liability in buying and selling their options, taking spread positions in the options market can be a more cost-effective alternative. Whilst spread betting still allows the trader access to the relevant options market as a basis for their investment, they also benefit from all the positives spread betting as a trading medium has to offer.
Why Spread Bet On Options?
The main benefit of spread betting on options is that it allows traders to capitalise on the inherent characteristics of options whilst also cashing in on the significant advantages of spread betting as a trading style.
Foremostly, spread betting is popular because it delivers incredible built-in leverage that is simply unachievable with other forms of trading. Because spread betting is, strictly speaking, a bet rather than a trade, investors are able to see returns of multiple thousands of percent within the realms of conceivability.
Because the stake is multiplied by every single point movement in a favourable direction, spread betting allows traders to win big in proportional terms to their stake, while also avoiding the headache of financial barriers to entry. A spread bet can be from less than £1 a point, whereas a single option may be a considerably more expensive purchase, depending on the value and nature of the asset to which it relates.
In addition, spread betting is inherently tax friendly in the UK, saving traders around 20% on the cost of each profitable transaction. Spread betting income is not taxed under the capital gains tax regime because there are no assets changing hands – traders are merely ‘wagering’ on the price movements of an asset, rather than actually owning the asset. This is often just a legal and notional distinction rather than one of any practical difference, but with significant savings to be had through the spread betting channel, it’s a distinction that proves itself to be profitable time and time again.
Options are also a good bellwether for wider market movements, and tend to move first ahead of the markets in correcting for the impact of any factors affecting asset value. When price volatility in a market seems as if it could be set to shake things up, traders can act quickly by jumping in on a spread position for options to capitalise on the forthcoming price swings. With the relevant stops tightly in place to guard against unexpected price movements, this can be a particularly effective strategy for trading options in a CGT-free, highly-leveraged way.