It is quite common to go long or short on an index like the FTSE. But is it smart? would it be better to use options instead?

Lets check… The FTSE closed today at 4234. Now lets say you want go long and you think that the bottom is around 4000. So you open a position with stop loss around 3980. Meaning you are risking 254 points or 6%. Your aim is to have 10% profit or 420 points (4654)
Now lets check different scenarios:

1. The FTSE goes to your direction and by 20 of April it reaches your target and close the position with 10% profit.
2. The FTSE goes to your direction but doesn’t touch your target and you decide to close the position somewhere in the middle with 5% profit
3. The FTSE goes down and hit your stop loss. 10% loss

Now lets check what would have happened if instead of buying the index directly you would bought an option. The call option of 4650 for April cost 64 points to buy. Lets check the scenarios again:

1. The FTSE goes to your direction and reaches your target. In this case your option will be worth much more. It depends how close the expiry date is, but in some cases your option could worth 300 points. 468% profit.
2. The FTSE goes to your direction but not touches your target. Still your option will be worth much more. So if for example in beginning of March the FTSE will be around 4450 your option will be worth around 120 points. So you sell it before it way before it is due to expired. 100% profit.
3. The FTSE goes down – your options worth nothing and you lost 64 points or 100%.

As you can see your profit can be much more and the loss is less (although you lost 100% you risked less points) but more important is that the market moves up or down. With option you get the chance to stay in the game with low risk even if the market goes against you. Because you risked only 64 points. If you bet on the FTSE directly and decide to take the risk without using stop loss you risking much more and you could end up losing lots of money. With an option you just limit your potential losses and maximise your profits.

If you use it smart you can gain nice profits.