City Index has launched Knockout Options with transparent pricing. This is what you need to know about it
Experienced investors would be familiar with the ebb and flows of the markets. However, in this season of heightened volatility, with geo political tensions colliding with the unpredictability of the Covid-19 outbreak, even the most seasoned investors would need ways to manage their investment risks.
Here’s where City Index seeks to plug the gap. The brokerage recently launched Knockout Options in Singapore, a limited risk product that provides higher leverage, transparent pricing and a potentially unlimited upside.
This is everything you need to know about it.
What is the Knockout Options product by City Index?
Knockout Options are a form of options trade where prices move in step with the underlying City Index price, making it much simpler to understand than other options trades.
It is also a limited risk product, where you get to decide exactly how much you are willing to lose in a single trade even before you open the trade. If the market moves in your favour, your gains could be limitless. And if the market moves against you, your losses are capped at the level you selected at the start.
The Knockout Options product by City Index is available for trading FX, indices and commodities. And, with the availability of both UP KO and DOWN KO, you can trade in both bull and bear markets.
Here’s how Knockout Options are traded.
Steps to Trade Knockout Options by City Index
Step 1 – Decide how you think the market will move
You will start trading KO by first deciding which way you think the market is going to move. If you think prices will rise, you will buy a UP KO. If you think prices will fall, you will buy a DOWN KO.
Step 2 – Choose your maximum allowable risk
Next you will decide where to place your knockout level. That is the price at which you want to close your trade if the market moves against you. The size of your trade and the distance of your KO level from the current price will determine the margin required for your trade and your maximum risk on this trade.
Step 3 – Open your trade with confidence
When the market moves in your favour, you can choose to close your trade at any point before the contract expires and take profit. When the market moves against you and breeches your chosen KO level, the trade closes at your KO level with no slippage and your losses will be limited to your initial margin.
Here’s how a KO trade looks in practice.
Knockout Options trading IRL
Let’s say you want to trade Wall Street futures and think prices are going to go up. So you buy to open the Wall Street Nov 20 UP KO contract which has an underlying Ask Price of 29025.5. Take note that this contract has an expiry in November 2020.
You decide to trade US$5 per point and set your Knockout Level at 28925.5, which is 100 points away from the current price. In this case, the opening price of your Knockout Option is 100.
The maximum risk on this trade will be calculated this way:
Maximum Risk = Knockout Option opening price x Trade Size
= 100 x US$5
The margin requirement on this trade is calculated this way:
Margin Requirement = (Knockout Option opening price x Trade Size) x 1.1*
= (100 x US$5) x 1.1
*The 1.1 multiplier is an additional margin requirement for compliance with MAS regulations.
Wall Street price goes up in your favour by 50 points to 29075.5. You close your position and take profit. Your profit is calculated in this manner:
Profit = (Knockout Option closing price –Knockout Option opening price) x amount/point
= (150 – 100) x US$5/point
You gained a profit of US$250 on this trade.
If Wall Street moved against you and your position was closed at your Knockout Level, your loss remains capped at US$500.
Why use Knockout Options?
Knockout Options allow investors to trade in new markets with a limited and accepted level of risk, while allowing them to profit from any upside. This is how a KO trade compares with a CFD trade that has a Guaranteed Stop Loss Order (GSLO) in place, and another CFD trade with no risk management in place at all.
Knockout Options vs GSLO CFD trade vs No stop CFD trade
Market: Wall Street / Wall Street UP KO
Trade Size: Long US$5/point at 29025.5
Scenario: Wall Street gaps down by 200 points to 28825.5. The KO and GSLO CFD trades close at its specified level. The standard CFD trade is closed manually.
|Knockout Option||CFD Trade (GSLO)||CFD Trade (No Stop)|
|Knockout Level/Stop Level||28925.5||28925.5||NIL|
|Knockout Price / Stop distance||100||100||NIL|
|Realised Loss||US$500||US$500 + US$10 stop premium||US$1000|
There are a few takeaways from the scenario above. First of all, you’ll notice that both the KO and GSLO CFD trades have a much lower margin requirement (US$550 vs US$7,256.38), due to their limited risk nature. On top of that, you can also clearly see how Knockout options effectively protects your downside with a lower realised loss (US$500 vs US$510 vs US$1000).
Transparent costs of Knockout Options from City Index
The key differentiator of City Index’s Knockout Options offering is its competitive and simple-to-understand pricing structure.
The cost of Knockout Options from City Index is included its spread, which means that what you see upfront, is what you will be paying for. There are no additional, hidden, or complicated transaction fees involved to provide the guaranteed close out on your trade.
That means, while spreads in City Index appear wider than those offered by other brokers, you can be sure you will not be charged in any other manner or form. You can find more detail on spreads for different markets here.
On top of that, City Index does not charge overnight transaction fees for KO on indices and commodities markets.