If you’re trading options in the UK, you must be aware of the regulatory environment in which you are trading. We’ll advise you on how to trade responsibly listed options and comply with regulations. We’ll also provide an overview of the main types of options available on UK exchanges. So if you’re looking for guidance on getting started in UK options trading, read on and find more info here.
What are options, and why trade them?
An option is a contract between two parties that gives the holder the right, but not the obligation, to purchase or sell an underlying asset at a specified price on or before a specific date. Options are typically used as a hedging or speculative tool and can be traded on various underlying assets, including stocks, commodities, currencies and interest rates.
There are main types of options: call options and put options. Call options give the holder the right to buy the underlying asset, while put options give the holder the right to sell the underlying asset. The strike price is the price at which the underlying asset can be bought or sold. The date when the option expires is known as the expiration date.
Options can be traded on a variety of different exchanges, including the London Stock Exchange (LSE), the New York Stock Exchange (NYSE) and the Chicago Board Options Exchange (CBOE). In the UK, options are regulated by the Financial Conduct Authority (FCA).
The main reasons to trade options are:
To hedge against an underlying asset position: If you own a stock, for example, you might buy a put option to protect yourself against a fall in the stock price. It is known as a protective put.
To generate income: You can also sell options – known as writing options – to generate income. It is especially popular with experienced investors comfortable with the risks involved.
The benefits of trading listed options
The listed options are regulated products. The FCA regulates all listed options traded on UK exchanges, providing a high level of protection for traders.
The listed options are transparent. The price of a listed option is determined by supply and demand in the market, making it easy to see what prices are quoted and compare different offers.
Listed options provide limited risk. Unlike some other types of derivatives, such as futures contracts, the maximum loss you can incur from trading a listed option is limited to the premium you paid for the option.
What are the risks of trading listed options?
Options trading is not without risk. The most important thing to remember is that options give you the right to buy or sell an asset, not the obligation. You could lose your investment if the underlying asset price moves against you.
Another risk to be aware of is time decay. An option’s value tends to decline as it approaches its expiration date. The further away an option’s expiration date is, the more time there is for the underlying asset price to move in the option holder’s favour.
Finally, it’s important to remember that options are a leveraged product, which means that a slight movement in the underlying asset price can significantly impact an option’s value. For example, if you buy a call option with a strike price of 100 and the underlying stock price rises to 101, your option will increase in value more than if the stock price had risen to 99.
How to trade options
If you’re interested in trading options, the first step is to open an account with a broker that offers options trading. You will also need to deposit capital into your account to cover buying options costs.
Once you have opened and funded an account, you can start trading options. To buy an option, you will need to choose an underlying asset, select a strike price and expiration date, and decide whether you want to buy a call or put option. You will also need to enter the amount of money you want to invest.
When you have placed your trade, it will be subject to the rules and regulations of the exchange on which it is traded. These rules will determine when and how your trade can be executed.
Tips for successful trading
If you’re new to options trading, here are a few tips to help you get started:
Start with small trades: Options trading is a risky business, so it’s essential to start slowly and build up your experience.
Learn about the different types of options: There are many options, so it’s essential to understand the differences before you start trading.
Choose your broker carefully: Not all brokers offer the same products or services, so choosing one that meets your needs is essential.