KID – Options

KEY INFORMATION DOCUMENT (“KID”) – Options

Purpose

This document provides you with key information about this investment product. It is not marketing material. The information is required by law to help you understand the nature, risks, costs, potential gains, and losses of this product and to help you compare it with other products.

Products

This KID relates to Options provided by Clear Capital Markets, a firm authorised and regulated in the UK by the Financial Conduct Authority under Firm Reference Number: 706689. +44 (0)20 3869 6080. This product can be traded through through, City Index, Saxo Bank and TradeTech here on known as ‘The Platforms’.

What is this product?

Type

Options are a financial derivative instrument that gives you the right, but not the obligation to purchase or sell an asset at a specified price, known as the strike price, before a certain expiry date. Options are a versatile financial instrument that can be broken down into two forms: calls and puts. A call is the right to buy an asset for a given price within a given period of time. Buyers of a call option are speculating on an increase in the price of an asset. They have the right to buy an asset at the strike price of the contract. Sellers of a call option are speculating on a fall in the price of an asset (or to remain stable). Selling options is often referred to as ‘writing options’. Buyers of a put option are speculating on a fall in the price of an underlying asset. Sellers of a put option are speculating on a rise in the price of an underlying asset (or at least stay stable). Selling options carries inherent risks. A worst-case scenario for a call seller is a strong market rally far greater than the premium received. A worst-case scenario for a put seller is a downward market move far greater than the premium received. For call options, the option is said to be in-the-money if the share price is above the strike price. A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value. An option is out-of-the-money if the price of the underlying remains below the strike price (for a call), or above the strike price (for a put). An option is at-the-money when the price of the underlying is on or very close to the strike price. For example, if the December FTSE is currently trading at 7500 then the December FTSE 7400 call option has 100 pts of intrinsic value. Any additional value to the options price is represented by time value. The more time to expiration, the greater the time value of an option.

A contract for difference (“CFD”) on an option is a leveraged contract entered into with The Platforms on a bilateral basis. It allows an investor to speculate on rising or falling prices (or volatility) in an underlying instrument. This may be an index, FX pair, commodity, interest rate or individual equity. When trading on options with The Platforms one never actually owns the right to the option. Clients are speculating on the price and value of a particular option.

An investor has the choice to buy (or go “long”) the option to benefit from rising prices in the underlying (or an increase in volatility); or to sell (or go “short”) the option to benefit from falling prices in the underlying (or a fall in volatility). The price of the option is derived from a number of factors. These include the price of the underlying instrument, which may be either the current (“cash”) price or a forward (“future”) price; the time to expiry and the volatility in the underlying market. All option prices are derived using the Black Scholes formula and the aforementioned parameters. For instance, if an investor is long a FTSE 100 call option and the value of the option increases either via an increase in the underlying or a rise in volatility – at the end of the contract The Platform will pay the difference between the closing value of the contract and the opening value of the contract. Conversely, if an investor is long and the price of the CFD option falls, at the end of the contract they will pay The Platform the difference between the closing value of the contract and the opening value of the contract. An options contract will have a pre-defined expiry date. The contract will automatically be closed out basis the pre-determined settlement rules on this pre-defined expiry date unless the contract is closed before by the client.

As the initial investment is equal to the total exposure of the trade when buying a spread bet on an option is not classed as a leveraged product. It is important that clients are aware of the risks involved in trading options. When buying options there is a maximum loss, unlimited profit profile. When selling options there is a limited profit and potentially unlimited maximum loss profile. When buying an option, an option premium (price) is paid. The premium is paid when the contract is initiated. When selling (writing) options the margin incurred is equal to the underlying assets margin factor multiplied by the stake size.

Risk profileMargin incurred
Long CallStake size x option premium
Long PutStake size x option premium
Short CallStake size x underlying deposit factor
Short PutStake size x underlying deposit factor

Objectives

There are three potential objectives of placing a spread bet on an option: 1) to limit risk, 2) protect against potential losses as part of a wider portfolio or 3) speculate. Spread bets on options can allow an investor to gain exposure to the movement in the value of the underlying instrument (whether up or down), without actually needing to buy or sell the underlying asset or constituent parts or to gain exposure to the volatility of the underlying instrument. The exposure when buying is not leveraged since the spread bet option only requires the full notional value of the position to be put down upfront as initial margin. By way of example, if an investor buys £10 per point of the October FTSE 7400 call option at a price of 20 the total investment will be £200 (20 x £10). As per the BlackScholes model, for each 1 point change in the price of the option so the value of the option position changes by £10. As previously stated this change in the options price may arise from a move in the underlying asset or a change in the volatility on the underlying asset or both.

All options offered by The Platforms have a pre-defined expiry date. As a result, there is no recommended holding period for options and it is down to the discretion of each individual investor to determine the most appropriate holding period based on their own individual trading strategy and objectives.

Failure to deposit additional funds in the case of negative price movement may result in the option being autoclosed. This will occur when losses exceed the initial margin amount in a given position. The Platforms also retain the ability to unilaterally terminate any spread bet option position where it deems that the terms of the position have been breached.

Intended Retail Investor

Placing a spread bet on options is intended for investors who have knowledge of, or are experienced with, derivatives. Likely investors will have some understanding of how the prices of options are derived, and the fact that when selling options, potential losses are not limited to the option premium. Indeed, they will understand the risk/reward profile of the product compared to traditional share dealing. Investors will also have appropriate financial means and the ability to bear losses in excess of the initial amount invested in a given position.

What are the risks and what could I get in return? Risk indicator The summary risk indicator is a guide to the level of risk of this product compared to other products. It shows how likely it is that the product will lose money because of movements in the markets or because we are not able to pay you. We have classified this product as 7 out of 7, which is the highest risk class. This rates the potential losses from future performance of the product at a very high level.

Spread bets on options are products that, due to underlying market movement, can generate losses rapidly. When selling an option, losses can exceed the amount invested in a given position and you may be required to deposit additional funds in order to maintain your positions. There is no capital protection against market risk, credit risk or liquidity risk. It is possible to lose all of the money on your account.

Be aware of currency risk

It is possible to buy or sell a CFD on an option on an underlying instrument in a currency which is different to the base currency of your account. The final return you may get depends on the exchange rate between the two currencies. This risk is not considered in the indicator shown above.

Market conditions may mean that your CFD option trade on an underlying instrument is closed at a less favourable price, which could significantly impact how much you get back. We may close your open option contract if you do not maintain the minimum margin that is required, if you are in debt to the company, or if you contravene market regulations. This process may be automated. This product does not include any protection from future market performance so you could lose some or all of your investment. If we are not able to pay you what is owed, you could lose your entire investment. However, you may benefit from a consumer protection scheme

What happens if The Platforms are unable to pay out

If The Platforms are unable to meet its financial obligations to you, you may lose the value of your investment however, we believe the Firm segregates all Retail Client funds from its own money in accordance with the UK FCA’s Client Asset Rules. The Platforms also participate in the UK’s Financial Services Compensation Scheme (“FSCS”) which covers eligible investments up to £85,000 per person, per firm. See www.fscs.org.uk

How long should I hold it and can I take money out early?

CFDs on options are intended for short or longer term trading, in some cases intraday and could be suitable for long term investments. There is no recommended holding period, no cancellation period and therefore no cancellation fees. You can open and close a CFD on an option at any time during market hours.

What are the costs?

Trading a CFD on an option incurs the following costs:

The table shows the different types of cost categories and their meaning
Cash and Futures
One-off entry or exit costs
Spread
The difference between the buy price and the sell price is called the spread_ This cost is realised each time you open and close a trade_
Currency Conversion
Any cash. realised profit and losses. adjustments, fees and charges that are denominated in a currency other than the base currency of your account, will be converted to the base currency of your account and a currency conversion fee will be charged to your account
Cash and Futures
Incidental Costs
Distributor Fee
We may from time to time, after informing you, share a proportion of our spread, commissions and other account fees with other persons including a distributor that may have introduced you

How long should I hold it and can I take money out early?

CFDs on options are intended for short or longer term trading, in some cases intraday and could be suitable for long term investments. There is no recommended holding period, no cancellation period and therefore no cancellation fees. You can open and close a CFD on an option at any time during market hours.

How can I complain?

If you wish to make a complaint about Clear Capital Markets, you should contact our client services team on 0203 869 6080, or email compliance@clear-cm.co.uk. If our client services team is unable to resolve the matter you may refer it to our compliance department. If you do not feel that your complaint has been resolved satisfactorily, you are able to refer your complaint to the Financial Ombudsman Service (“FOS”). See www.financial-ombudsman.org.uk for further information. You can also refer to the European Commission’s Online Dispute Resolution Platform, however it is likely that you will be referred to the FOS.

Other relevant information

If there is a time lag between the time you place your order and the moment it is executed, your order may not be executed at the price you expected. Ensure your internet signal strength is sufficient before trading. The Terms and Policies section of our website contains important information regarding your account. You should ensure that you are familiar with all the terms and policies that apply to your account.