If you are thinking about trading options in the UK, there are a few key terms and definitions you should be familiar with.
What is an options contract in the UK financial marketplace?
An options contract is an agreement between two parties to buy or sell an underlying asset on or before a specific date. The party who agrees to buy the asset is known as the ‘holder’, while the party who agrees to sell is known as the ‘writer’. The different types of options contracts in the UK include:
European style- which can only be exercised on the expiration date
American style- which can be exercised at any time up to and including the expiration date.
What is the difference between a covered and naked call in the UK?
A ‘covered’ call is one where the holder of the option also owns the underlying asset. A ‘naked’ call is where the holder does not own the underlying asset.
What are ‘Options Greeks’?
‘Options greeks’ are factors that affect the price of an options contract. These include:
- Delta- measures how much the price of an option contract will change for a given change in the price of the underlying asset.
- Gamma- measures how much the delta of an option contract will change for a given change in the price of the underlying asset.
- Vega- measures how much the price of an option contract will change for a given change in volatility.
- Rho- measures how much the price of an option contract will change for a given change in interest rates.
- Theta- measures how much the price of an option contract will change over time.
The benefits of trading options contracts in the UK
Options contracts offer many benefits to traders, including:
- The ability to hedge against losses in an underlying asset.
- The ability to generate income through the writing of options contracts.
- The flexibility to tailor trades to specific market conditions and objectives.
The risks of trading options contracts in the UK
Options contracts also come with many risks, including:
- The risk of loss if the underlying asset moves in the wrong direction.
- The risk that the options contract will expire worthlessly.
- The risk of being assigned an options contract (if you are the writer).
- The risk of losing money to counterparty risk (if you are trading with a dealer rather than on an exchange).
How to place an order for an options contract on a UK financial marketplace
When you want to place an order for an options contract, you will need to provide your broker with the following information:
- The type of options contract you want to trade (call or put)
- The underlying asset you want to trade.
- The expiration date of the options contract
Your broker will then execute the trade on your behalf. It’s important to remember that options contracts are a leveraged product, resulting in losses that exceed your initial investment. For a list of available options for trading in the UK, you can visit the website of a reputable and licensed broker here.
Tips for success when trading options contracts in the UK
Trading options contracts can be a great way to make money, but knowing what you’re doing is essential. Here are some valuable tips to assist you in succeeding:
Choose the right broker- Make sure you choose a broker regulated by the Financial Conduct Authority (FCA). It will ensure that your broker is reputable and that your funds are safe.
Be cautious of scams- Many scams target option traders, so it’s essential to be aware of them. Sometimes something might seem too good to be true, and it most likely is.
Have a plan- When trading options, it’s crucial to have a well-reasoned plan. Ensure you know what you are trying to achieve and how you’ll exit your trades before entering them.
Manage your risk- Options trading can be risky, so it’s essential to manage your risk carefully. Use stop-loss orders and limit your position size to help protect yourself from catastrophic losses.
Stay disciplined- It’s easy to get emotionally involved in your trades, but it’s crucial to stay disciplined and stick to your plan. Don’t let greed or fear influence your decisions; let yourself dictate where your trade goes.