Listed options trade on an organised exchange, such as the London Stock Exchange. There are two types of listed options:
- Call options: If you’re the holder of a call option, you have the right to buy a certain number of shares at a set price within a specific period.
- Put options: If you own put options you have the right to sell shares at a set price within a specific period.
Most listed options in London are traded on the Options Exchange (part of the London International Financial Futures and Options Exchange (LIFFE)) or electronic trading platforms such as Turquoise Plato.
Who issues listed options?
Banks and investment firms issue the most listed options in London. These institutions act as market makers, meaning they quote a buy and sell price for each option.
Advantages of trading listed options?
Listed options offer several benefits to traders. These include:
Liquidity and flexibility
Listed options are highly liquid and can be easily bought and sold. It is due to many market makers quoting prices for each option. Listed options offer a high degree of flexibility as they can be used for various purposes. For example, they can be used to hedge an existing position or speculate on an underlying asset’s future price movement.
Tight bid-ask spreads
It is the difference between the prices quoted for an option by the market maker. Listed options typically have tight bid-ask spreads, which means traders can buy and sell options at close to the same price.
Transparent pricing
Listed options are priced transparently on organised exchanges. It means that traders know exactly how much they will pay or receive for an option before trading it.
Efficient execution
Since listed options are traded on an exchange, they can be efficiently executed. It is beneficial for traders who want to enter or exit a position quickly.
What are the risks of trading listed options?
Like any financial product, there are risks associated with trading listed options. These include:
Volatility and leverage
The prices of options can be very volatile, meaning they can move sharply up or down. It makes them risky investments. Options provide leverage, meaning traders can control a large stock for a small initial investment. It can result in considerable losses if the trade goes against the trader.
Liquidity and counterparty risk
Although options are generally liquid, some types may be less so. It may be challenging to find a buyer or seller when you want to exit a position. When trading options, you are entering into a contract with another party. It means there is a risk that the other party will not honour their side of the deal.
Expiry and regulatory risk
Options have a limited lifespan and will expire at a specific date. It means traders need to be aware of the expiry date and close their positions before then. The regulations surrounding options trading are complex. There is a risk that regulatory changes could impact the market or your ability to trade options.
How can I start trading listed options?
Here are the steps to start trading listed options:
Choose a broker
Many brokers offer listed options trading. It is crucial to choose a broker, like Saxo capital markets, that is regulated by the FCA and offers a good platform for trading.
Open an account
Once you have chosen a broker that best suits your needs, you will need to open an account. It usually involves completing an online application and providing ID documents such as a passport or driving licence.
Fund your account
Before starting trading, you will need to deposit funds into your account. Most brokers accept payments by bank transfer or credit/debit card.
Choose your options
Once your account is funded, you can start choosing the options you want to trade. You can do this via the broker’s online platform.
Place your trade
Once you have selected the options you want to trade, you can place your trade. It is done via the broker’s online platform. You will need to enter the details of your trade, such as the number of contracts, the strike price and the expiry date. Once your trade is placed, it will be executed immediately at the best available price.