Listed options are a type of derivative instrument that allows investors to speculate on the future direction of an underlying asset. The most common underlying assets include stocks, indexes, commodities, and currencies. Options are traded on exchanges or over-the-counter (OTC) as puts or calls.
Puts are a contract that gives the holder the right, but not the responsibility, to sell an underlying asset at a specified price on or before a specific date. Calls are similar to puts in that they enable investors to profit from movements in the market. Traders can use both options for hedging or speculative bets on future price movements.
To trade options, investors need to have a margin account with a broker that offers listed options trading. Once an account is opened, the investor can order buy or sell options through the broker.
Strategies for trading listed options in the UK
Several different trading strategies can be used when trading listed options. The most common are covered call writing, bullish and bearish put spreads, and bullish and bearish call spreads.
Covered calls
Covered call writing involves selling call options while simultaneously holding the underlying asset. This strategy is used when investors expect the underlying asset price to remain unchanged or increase slightly. The risk of this strategy is limited to the premium received for selling the call option.
Bullish and bearish put spreads
A bullish put spread involves buying a put option with a lower strike price and selling a put option with a higher strike price. This strategy is used when investors expect the underlying asset price to increase. The maximum risk of this strategy is the difference between the two strike prices, which is less than the premium received for selling the higher strike put option.
A bearish put spread involves selling a put option with a lower strike price and buying a put option with a higher strike price. This strategy is used when investors expect the underlying asset price to decrease. The maximum risk of this strategy is the premium paid for buying the higher strike put option.
Bullish and bearish call spreads
A bullish call spread involves buying a call option with a lower strike price and selling a call option with a higher strike price. This strategy is used when investors expect the underlying asset price to increase. The maximum risk of this strategy is the difference between the two strike prices which is less than the premium received for selling the higher strike call option.
A bearish call spread involves selling a call option with a lower strike price and buying a call option with a higher strike price. This strategy is used when investors expect the underlying asset price to decrease. The maximum risk of this strategy is the premium paid for buying the higher strike call option.
What are the risks of using a strategy when trading listed options?
The risks of using a strategy when trading listed options include the risk of losing money and the risk of not making enough money. The risk of losing money is limited to the amount invested in the options contract. The risk of not making enough money is limited to the difference between the strike price and the underlying asset’s price at expiration.
What are some things to consider before trading listed options?
Before trading listed options, you should consider your investment objectives, risk tolerance, and broker’s fees. You should also be aware of the tax implications of trading options. For example, in the United Kingdom, any gains from selling options are subject to capital gains tax.
How can I learn more about trading listed options?
The best way to learn about trading listed options is to consult a financial advisor or broker offering listed options trading. You can also find information online from sources such as the London Stock Exchange’s website.
The final word
There are many different factors to consider when trading listed options. These include the type of option, the underlying asset, the expiration date, and the strike price. It is crucial to have a clear understanding of these factors before entering into any online options trading.