What are options?
At its simplest, an option gives you the right but not the obligation to trade an underlying asset at a fixed price for a limited period. That 'fixed' price is known as the strike price, whereas the limited period in which you have the right to take up the option is known as the expiry date.
Join an authorized firm
To trade listed options in the UK, you need to be a member of an authorized investment firm. You can find a list of authorized firms on the Financial Conduct Authority website. Once you have joined an investment firm, you will need to open a trading account and fund it with at least £2,000. Visit now to join a world-renowned investment firm!
Choose what you want to trade
You can then choose from various investment products, including options. To trade an option, you first need to decide which underlying asset you want to purchase the option on stocks, indices, commodities or currencies. It will help if you then choose if you wish to buy or sell an option (known as buying or writing an option)
If you decide to buy an option, you are said to have opened a long position, whereas if you choose to sell one (known as writing an option), you are opening a short position. You can close your position by simply closing it out with your investment firm.
Choose an expiry date
Once you've decided on the asset and whether you want to buy or sell an option, the rest is pretty straightforward: just enter how many lots of options you want to buy or write, then put in the price that will be used for the strike price. After this, all that's left is to choose your expiry date and place your order!
Benefits of listed options
One of the best features of trading listed options in the UK is flexibility. Not only are they highly customizable, but they can also be purchased as Single or Multiple Option Contracts.
With a single option contract, you have the choice of buying or writing an option for a particular number of shares at a predetermined price before a set date.
On the other hand, multiple options give you more freedom by buying or writing up to nine different contracts with different numbers of lots and expiry dates. It means that various options are best suited to those who want complete flexibility over their investment choices.
However, there is no need to worry about making mistakes: any decision you make can be reversed simply by closing out your position with your firm before the expiry date. The main thing is to have fun –remember, trading options can be as adventurous or conservative as you want them to be!
Tips to start trading listed options in the UK
Firstly, remember that options are derivatives – which means they derive their price from something else. It means that there is a chance your option position could increase or decrease regardless of how the underlying asset does. For example, if an option on a particular stock increases even though nothing has happened to the actual stock, then chances are the market expects something to happen soon. It would indicate that buying an option might not be a good idea at this time.
The best way to use options is to have a broader investment strategy. It means that you should always know the risks and rewards associated with any option position you take.
Don't forget to keep an eye on the expiry date! An option about to expire will be worth much less than one that still has plenty of time left before it expires.
So, those are just a few things to bear in mind when trading options in the UK. Have fun and good luck!
