Listed options are a type of derivatives contract that gives the holder the trading right, but not the obligation, to sell or purchase an underlying asset at a specified price on or before a specific date. Options are traded on stock exchanges such as the London Stock Exchange (LSE) and can be used for hedging purposes or to speculate on the future price movement of an underlying asset.
Types of listed options
There are two types of listed options: call options and put options. Call options give the buyer the right to buy an underlying asset at a given price, while put options offer the right to sell it at a specific price.
What is the strike price?
The strike price is when the underlying asset may be purchased or sold, and the expiration date is when the option expires. When buying or selling options, investors must specify the type of option, the strike price and expiration date.
Options can be bought and sold until the expiration date, at which point the option contract expires and is no longer valid. If an option is not exercised by the expiration date, it becomes worthless.
What is the premium?
The premium is the option contract price, and this is paid when the contract is first bought. The premium will fluctuate in value as market conditions change, which will impact how much profit or loss is made from an options trade.
An investor may choose to buy a call option if they believe the underlying asset’s price will rise or a put option if they think it will fall. If the price moves in the expected direction, the option will be profitable.
When the asset price moves in the opposite direction, the option will expire worthlessly, and investors will lose their premium.
Using options to hedge against the risk
Traders can use options to hedge against risk or speculate on future price movements. For example, an investor who owns shares in a company may buy a put option to protect themselves from a fall in the share price.
Different strategies for trading listed options
Here are some of the best trading strategies for listed options:
Buy a call option
Buying a call option is the most straightforward strategy and involves buying a call option hoping that the underlying asset of the listed option will increase in value. If it does, the option will be profitable.
Buy a put option
Buying a put is similar to buying a call option, but you hope that the underlying asset will fall in price with a put option. Again, if it does, the option will be profitable.
Sell a call option
Selling a call option is a more advanced strategy and involves selling a call option to receive the premium. The aim is to sell the option when the share price is high and repurchase it when it falls, making a profit on the difference.
Sell a put option
Selling a put option is another advanced strategy which involves selling a put option to receive the premium. The aim is to sell the option when the share price is low and repurchase it when it rises, making a profit on the difference.
A covered call is a strategy that involves buying shares of an underlying asset and selling a call option on those same shares. The aim is to sell the option when the share price rises, making a profit on both the shares and the option.
A protective put is a strategy that involves buying shares of an underlying asset and buying a put option on those same shares. The aim is to sell the shares when the price has risen, make a profit on the shares, and exercise the option if the share price falls, offsetting any losses.
Traders can use listed options to hedge against risk or speculate on future price movements, and many different strategies can be used when trading them. Novice traders are advised to use a reputable and experienced broker such as Saxo Bank before option trading uk.