It is no secret that UK markets have been volatile as of late. However, you can still generate healthy returns from your portfolio with the right tools and strategies. We will discuss one such tool – listed options, and we will explore how you can use these contracts to boost your profits in various market scenarios. So if you’re looking for an edge in today’s markets, keep reading.
What are listed options?
Listed options are contracts that give the investor the right, but not the obligation, to buy/sell an underlying security at a specified price within a specified time frame. While listed options are traded on exchanges, OTC (over the counter) options are traded directly between two parties.
Listed options are one type of derivative, a financial contract whose value is based on an underlying asset. The most common underlying assets listed options are stocks, ETFs, and indexes. Because listed options are derivatives, their prices are derived from the underlying asset’s price.
Why would an investor want to trade listed options?
One reason is that they can be used to hedge against risk in the portfolio. For example, if an investor owns a stock that they think will go down in price, they can buy a put option on that stock as insurance. Another reason to trade listed option is for speculative purposes. For example, if an investor thinks a stock will go up in price, they can buy a call option on that stock.
Are listed options different from traditional options?
Listed options are traded on an exchange, whereas traditional options are not. It means more price transparency with listed options and greater liquidity.
Another key difference is that listed options expire monthly, whereas traditional options can have a more extended expiration date. Lastly, the premium for listed options is paid upfront, whereas the premium for traditional options is only paid if the option is exercised.
Consequently, traditional options are often referred to as ‘out of the money’ options. In sum, listed options offer several advantages over traditional options regarding price transparency, liquidity, and expiration date.
The benefits of trading listed options
Trading listed options offer many benefits, including the ability to take advantage of leverage, the potential to generate income, and the ability to hedge against market volatility. When trading options, investors are not required to post 100% of the contract value as a margin, allowing them to take advantage of leverage, magnifying both profits and losses. In addition, options provide the opportunity to generate income through premiums and protect against downside risk by selling puts or buying calls.
Things you need to be aware of before trading
Before trading options, there are a few things you need to be aware of.
First, options are a leveraged product, which can amplify both gains and losses. Second, options are derivative instruments, which means their value is derived from the underlying asset, and it means that changes in the underlying asset price can impact the option’s value. Finally, options are subject to time decay, which means their value declines as expiration approaches.
It is vital to understand how options work before trading them. While they can provide the potential for significant profits, they also come with a high degree of risk. Before trading options, be sure to understand the risks and rewards involved.
How to get started with listed options today
If you’re interested in getting started with listed options trading, there are a few things you’ll need to do.
You will need to open an account with a broker (view here) that offers options trading. Once you’ve done that, you’ll need to choose the options you want to trade. Once you’ve chosen your options, you’ll need to place your trade.
You can choose to buy or sell options online or over the phone. When placing your trade, you’ll need to provide your broker with the following information: the stock ticker symbol, the expiration date, the strike price, and the number of contracts. After your trade has been placed, all left to do is wait and see how it performs. If all goes well, you could see some substantial profits.