Spread betting vs options: what are the key differences?

What’s the difference between spread betting and options trading?

Spread bets and options are both derivatives, but there are a range of differences between them.

Spread bets are generally used to predict if an asset’s price will go up or down by going long or short. You profit for every 'point' the price goes in the direction you predict. With options, you're buying or selling the right (but not the obligation) to trade an asset at a fixed price by a certain date. Spread bets are considered to be more flexible because you can trade on underlying spot prices (most popular), futures prices, or even options.

1. Expiry date
2. Asset classes
3. Ownership of assets
4. Medium of exchange
5. Trade sizes

Expiry date

Spread bets and options both have expiry dates, up until which point the position can be closed and profit or loss realised, or rolled over to the next expiry.

An option has an expiry date, which is the last date the holder of an option can exercise the contract for their chosen price – known as the strike price. Options can be closed at any point before or on this expiry date.

Once the expiry date has passed, the contract either have been exercised, or it’ll expire worthless. The decision is completely up to the contract holder, as they have the right but not the obligation to exercise the option.

Options can cover different timeframes, including daily, weekly and monthly expiry dates. Typically, options will have specific calendar expiry dates. For example, listed US stock options normally expire on the third Friday of the month.

Similarly, a spread bet can have a specific bet duration, which is the length of time before the position expiries. These durations are fixed, but can range from a single day to several months away. Just like options, a spread bet can be closed at any point up until this date of expiry.

With us, you’ll have the choice of two different bet durations:

1. Daily funded bets – these remain open for as long as you choose to hold them, with an expiry set in the distant future. They’re generally used for short-term trading, as they have the tightest spreads but are subject to overnight funding
2. Quarterly bets – these are futures bets, which expire at the end of each quarter. They can be rolled over, but you’d have to let us know in advance. Although you’d pay more upfront, all the overnight funding costs are built into the price, so they’re more cost efficient over the long term

When you trade options with us, you’d either buy or sell a listed options contract or get a spread bet or CFD (OTC) position on the underlying market. OTC positions could only be held until the underlying expiry date. Spread bet options are not available for roll over and will be settled according to each market’s individual settlement, which you can find on the deal ticket.

Asset classes

Options contracts can cover a range of assets.

1. US-listed options: traditional options contracts traded on US exchanges, covering stocks, ETFs, indices and futures

Spread bet (and CFD) options: speculate on option price movements without owning the underlying contract, on a variety of markets, including futures, stocks, indices, commodities, currencies, options and bonds

Ownership of assets

At the point of settlement, a few things can happen. Options contracts can be cash settled, or you’d have to take physical ownership of the assets, or you’d have to provide the underlying asset if it expires, or the contract can be rolled over.

There are two different types of settlement available to options holders:

1. Physical settlement – undertaking the physical delivery of a commodity or ownership of underlying shares, currencies and bonds
2. Cash settlement – rather than taking delivery or ownership of the asset, there would be a cash profit or loss depending on the final settlement price

With US-listed options, you have the right to take ownership of the underlying asset if you choose to exercise the option. This is different from CFD options or spread betting on options, where settlement is always in cash. This makes spread bets completely tax free.¹

Medium of exchange

Most options are exchange-traded, which means they’re standardised contracts that are settled through a clearinghouse. This is true for our US-listed options, which are traded on regulated US exchanges.

You’d be getting a specific quantity of whichever asset you want to trade, for a specific price. The most famous options exchange is the Chicago Board Options Exchange (CBOE).

Some options can be traded over the counter, these are known as exotic options. They consist of a private arrangement between the buyer and seller. As the strike price and expiration date are not standardised, there is a bit more flexibility. This is also the case with spread bets or CFDs on options.

Spread bets, including spread bet options, are over-the-counter (OTC) transactions, which take place directly between you and your broker or trading provider. OTC trades tend to be more flexible when compared to their exchange-based counterparts, which are more standardised in trade size. This means that you can create agreements that are specific to you and your trading strategy.

Trade sizes

Options trade in lots, which represent the number of underlying assets a contract covers. For example, a single share option is worth 100 of the underlying shares. So, if you wanted to buy a Tesla equity call option, you’d have the right to buy 100 shares of Tesla on or before your expiry date.

With spread bets, you have more control over your trade size. You can choose your position’s bet size, as long as it meets our minimum requirements. If you close your position before expiry, your profit or loss would be opening price minus closing price. If you keep the position open until expiry, your profit or loss is the difference between the opening price and the closing price of your position, multiplied by the value of your bet.

For example, if you put up a long bet of £10 per point of movement on gold, and the price moves 50 points in your favour, you’d have a profit of £500 (50 x 10). But if it moved 50 points against you, you’d have lost £500.

Similarities between options and spread betting

There are also plenty of similarities between options and spread bets too. Both are:

• Derivative products – which means they take their value from an underlying market, so you can trade without having to take ownership of the asset in question
• Speculative – you can go long or short on an asset’s price, trading markets that rise and fall in price
• Leveraged – you’ll get full market exposure for a fraction of the cost. While leverage can magnify profits, it can also magnify your losses, making it important to have a risk management strategy in place

Spread betting basics

When you spread bet, you’ll be placing a bet on the future direction of a market’s price. You’d buy the market – or go long – if you expect it to rise, and sell the market – or go short – if you expect it to fall.

Spread betting is charged via the spread – the difference between the buy and sell prices that are wrapped around the underlying market. This means you’ll always buy slightly above the market price, and sell slightly below.

Learn more about what spread betting is

Let’s say you expect the price of oil to rise from its current price of 4550 over the next couple of days. So, you decide to open a spread betting position to buy the market. If the price increased you’d profit but if it fell, you’d make a loss. Alternatively, if you thought oil would fall in price, you could open a spread betting position to sell the market. If it fell in price, you’d profit but if it increased instead, you’d lose.

Ready to start spread betting? Open an account with us today

Options trading basics

An options contract is an agreement that gives the holder the right, but not the obligation, to buy or sell an asset at a set price – called the strike price – on or before a set date of expiry. There are two types of options available: calls and puts.

Call options give you the right to buy an asset. You’d open a position to buy a call option if you thought the market would rise, and you’d sell a call option if you thought the price would fall or stay the same. While put options give you the right to sell an asset.

You’d buy a put option if you believe the market price will fall from its current level, and you’d sell a put option if you think it will rise.

With us, you have two ways to trade options:

1. US-listed options: trade traditional options contracts on US exchanges, with the potential for physical settlement
2. Spread bets and CFDs on options: speculate on option price movements without owning the underlying contract

Learn more about how to trade options

When you buy an options contract, you’d have limited risk. You’ll pay a premium to open the position, but this is all you could lose if you choose not to exercise the option. Alternatively, when you sell an options contract, you’d be selling your right to decide the outcome of the trade, for which you’d receive a premium – this means if the buyer decides to exercise the option, you’d have to fulfil your side regardless of whether or not it’s favourable to you.

Say you thought the price of US crude oil would rise from $35 to $45 a barrel over the next few weeks. You could buy a call option that gives you the right to buy the market at $40 a barrel at any time within the next month. You’d pay a premium for this right. If the market increased beyond $40, you could execute the contract and buy oil for a lower price than the current market value. If the market fell instead, you could leave the contract to expire worthless.

Spread bet options explained

When you trade spread bet options with us, you’ll be speculating on the underlying market price using spread bets and CFDs. This enables you to go both long and short without having to enter an options contract. You’ll be able to trade on a wide range of markets including forex, shares, stock indices and commodities.

Learn more about options trading with us

For example, if you thought the price of FTSE 100 options will rise, you could open a long spread bet position with an expiry date for the end of the month. If the price of the FTSE had risen at the expiry, you’d make a profit. However, if the price of the index declined instead, you’d have made a loss.

Want to start trading options? Create an account with us

Pros and cons of spread betting

Pros of spread betting

There are a range of benefits to spread betting. For example, you can:

• Access 17,000+ markets – including shares, indices, commodities and currency pairs
• Make your capital go further with leverage
• Go short without the intricacies of traditional short selling
• Trade tax free¹
• Hedge a shares portfolio
• Deal out of hours on key global indices and popular US shares

Cons of spread betting

Before you spread bet, it’s important to be aware that:

• Leverage can magnify losses, creating the need for a risk management strategy
• A level of expertise is required – trading in a demo account can help to develop your skills
• Any daily funded bets left open overnight are subject to overnight funding fees
  

Pros and cons of options trading

Pros of options trading

There are plenty of reasons options trading is so popular. For example, you can:

• With US-listed options, you can now trade on an award-winning platform with sophisticated risk management tools
• Access a wide range of US-listed options on stocks, ETFs, indices, and futures
• Choose between cash and margin accounts for different levels of exposure and strategy access
• Limit your risk when buying options, as you’ll only ever lose the premium paid
• Hedge against existing investment positions to protect your portfolio from negative movements
• Leverage your capital to open a position for just a small initial deposit
• Use a variety of different options strategies to suit your trading goals
• View all available prices and expiry dates quickly and easily on our in-platform options chain
  

Cons of options trading

Options are complex instruments, which makes it important to be aware that:

• US-listed options involve currency risk, as profits and losses are denominated in USD
• Assignment risk is higher with US-listed options, as they can be exercised at any time before expiry
• Losses are potentially unlimited when you sell naked options
• Options are suitable for more experienced traders, as they require a level of knowledge to understand how the mechanisms work
• Options prices are linked to their expiry date, which means the value of your contract decreases each day as the expiry date nears – known as time decay. This can make it difficult to perform analysis outside of a contract’s timeframe
• Taxation for options will depend on your location, and whether you want to take ownership of the asset at expiry, but usually capital gains tax and stamp duty would apply¹
• Leverage can magnify losses as well as profits, making it important to have a risk management strategy in place

Spread betting vs options summed up

• Spread bets and options are both popular derivative products
• Cash spread betting positions don’t have set expiry dates, while listed and OTC options do
• With listed options, you can trade stocks, ETF's, indices and future options. With OTC options, you can trade commodity, stock index, currency and interest rate options. And with spread bets, you can trade on the price of stocks, indices, commodities, currencies, options, bonds and futures
• When trading options, you can settle with the physical delivery of the asset or in cash. Spread bets are only cash-settled, so you won’t ever take ownership of the underlying assets
• Options are traded on exchange and over the counter, whereas spread bets are only traded over the counter
• Options are traded in standardised lots, while spread bet sizes can be customised
• Both options and spread bets are used for speculation on rising and falling market prices
• Options and spread bets are both leveraged products, which means profits and losses can be magnified
• There are a range of benefits to spread bets, such as the range of markets to trade, leverage, short selling, and tax-efficient trading1
• There are risks of spread betting to be aware of, such as magnified risk, complexity and overnight fees on daily funded bets
• There are a range of benefits to options trading, such as limited-risk positions for holders, hedging, leverage and flexibility
• There are risks of options trading too, such as unlimited downside risk for sellers, tax upon physical settlement1 and the possibility of magnified losses when you trade with leverage

Create an account to get started spread betting or trading options. Alternatively, you can practise trading with a risk-free demo account.

Footnotes

¹ Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.