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Discover the basics of options trading, including: what options are, what markets you can trade, what moves option prices and how to start trading options in the UK. Choose from a variety of expiry dates and trade a variety of markets when you trade options with us.
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Options trading is the act of buying and selling options. These are contracts that give the holder the right, but not the oblation, to buy or sell an underlying asset at a set price if it exceeds that price within a set time frame.
For example, let’s say you expected the price of US crude oil to rise from $50 to $60 a barrel in the next few weeks. You decide to buy a call option that gives you the opportunity to buy the market at $55 a barrel any time in the next month. The price you pay to buy the option is known as the ‘premium’.
If US Crude Oil rises above $55 (the ‘strike’ price) before your option expires, you can buy into the market at a discount. But if it goes below $55, you don’t have to exercise your right and can simply let the option expire. In this scenario, all you will lose is the premium you paid to open your position.
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When trading options with us in the UK you will be using spread betting or CFDs to speculate on the option premium – which will fluctuate depending on how likely the option is to be profitable at expiry. These are leveraged products, which means that you will pay an initial deposit (called a premium) upfront to open a position. Trading options in this way can form an important part of a broader strategy. However, profits and losses are calculated based on the total position size, not the prize size.
Buying a call option gives you the right, but not the oblation, to buy an underlying market at a set price – called a ‘strike’ – on or before a set date. The more the market value increases, the more profit you can make.
You can also sell call options. As a seller of a call option, you are obligated to sell in the market at the strike price if the option is executed by the buyer at expiration.
Options are leveraged products like CFDs and spread betting; they allow you to speculate on the movement of a market without owning the underlying asset. This means that profits can be magnified – as can your losses if you are selling options. When buying call options like spread bets or CFDs with us you will never risk more than your down payment when buying, just like trading a real option, but when selling calls or puts your risk is potentially unlimited (although the balance your account never drops below zero). Your positions will always settle in cash at expiration. You will never have to deliver or accept delivery of the underlying.
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Purchasing a put option gives you the right, but not the oblation, to sell a market at the strike price on or before a defined date. The more the market cap decreases, the more profit you make.
You can also sell put options. As a put option seller, you have an obligation to buy the market at the strike price if the buyer exercises his option at expiration.
UK options traders can use spread betting and CFDs to speculate on option prices – rather than trading them directly. As spread bets and CFDs are cash settled at close, you never need to deliver or accept delivery of the underlying. However, both are leveraged forms of trading options. This means that you will pay a smaller deposit (known as margin) to open your trade, but will have your profit or loss calculated based on the total position size. Therefore, you can lose (or win) substantially more than your initial deposit. Please note that when buying call options such as spread bets or CFDs with us, your risk is always limited to the margin you paid to open the position. But when selling call options, your risk is potentially unlimited.
Options are leveraged products like CFDs and spread betting; they allow you to speculate on the movement of a market without ever owning the underlying asset. This means your profits can be magnified – as can your losses if you are selling options.
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For traders looking for greater leverage, options trading is an attractive choice. By choosing the strike price and trade size, you gain greater control over your leverage than when trading the spot markets.
If you are a UK trader who is buying call or put options as spread bets or CFDs with us, your risk is always limited to the margin you paid to open the position. However, it is important to remember that when selling calls or puts your risk is potentially unlimited, so an effective risk management strategy is important.
Let’s say you own stock in a company, but you fear that its price will drop in the near future. You can buy a put option on your stock at a strike price close to the current level. If your stock price falls below the strike price on your option expiration, your losses will be capped by the option gains. If your stock price goes up, you’ve only lost the cost of buying the option in the first place.
Traders use some specific terminology when talking about options. Here is a summary of some of the key terms:
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There are three main factors that affect the premium, or margin, you pay when trading UK options. These factors all work on the same principle: the more likely it is that the underlying market price will be above (calls) or below (puts) an option’s strike price at expiration, the greater its value.
When you place a bet or trade CFDs on an option with us, you pay a margin which works similarly to a traditional option premium. The two terms are used interchangeably below.
The Greeks are measures of the individual risks associated with trading options, each named after a Greek symbol. Understanding how they work can help you calculate the risk involved with each of the variables that affect option prices.
There are countless strategies you can use to get different results when trading options. Popular options trading strategies include:
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Depending on the type of trading you are doing, you can choose from daily, weekly, monthly or quarterly options to suit your objectives.
Use daily and weekly options if you want to take positions in markets quickly, but with greater control over your leverage than when trading other products – such as CFD trading or spread betting on spot markets.
If you’re looking at long-term market movement, monthly and quarterly options mean you can take positions up to three quarters before expiration – plus you’ll know your risk upfront and generally save on funding fees.
Once you know the time frame you are going to trade, you need to determine whether you want to buy or sell a call or put in the market you are trading. The type of option you trade, and whether you buy or sell it, will depend on whether you want to speculate on the rising or falling market. Remember that buying options is risk-limited, while selling is not.
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Once you’ve decided whether to buy or sell, you can choose the strike price and the premium (or margin) you want to open the position at and place your trade.
After opening a position, you need to keep an eye on market movement and the potential profit or loss of your position.
If the option is in-the-money, you can close it before expiration to maximize profit. Or, if you don’t make a profit, you can leave your position open until expiration, and if it turns out to be unprofitable, you will only lose the price you paid to open it.
* Tax laws are subject to change and depend on individual circumstances. Tax laws may differ in a jurisdiction other than the UK.
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Options trading is the buying and selling of options. Options are financial contracts that