Before you can begin trading options in the UK, there are several essential things that you should know, mainly if you are new to the world of options trading. Options trading is complex, and knowing all of the ins and outs will help ensure that your trades are executed correctly and efficiently.
What does an options contract represent?
The first thing to understand about options trading is what precisely an option contract represents. An option gives its owner the right to buy or sell an asset at a fixed price on or before a specific date. If this fixed price is higher than the market price at any given time, it allows for significant profit potential if held long enough; it also limits the potential downside if the market price falls below the fixed price.
Two options contracts
The second important thing to understand about options trading is that there are two option contracts – American and European. The difference between the two is that an American option can be exercised before the expiration date, while a European option can only be exercised on the expiration date. This distinction is essential to bear in mind when trading, as exercising an option contract early can result in a loss. Waiting until the expiration date may not give you enough time to make a profit.
Another critical factor to consider when trading options is implied volatility. Implied volatility reflects how much traders expect the stock price to move in future. Options with high implied volatility will cost more than options with low implied volatility, so it is important to bear this in mind when trading.
Concept of “Greeks”
You should understand the concept of ‘greeks’ and how they can help you predict an option’s potential future price movements. These include delta, gamma, vega and rho. It may seem intimidating at first, but you will quickly get used to these concepts.
Choose a broker
After this, you need to choose a broker. It doesn’t have to be complicated; it is simply essential to use your common sense when deciding who to trade with. Look for the following key features in any brokers offering options trading in the UK; they should provide an easy-to-use online trading platform, low margin requirements, competitive overnight financing rates, and support services such as live chat and email help desks that are available around the clock. You also need to know what types of accounts are available – there are cash accounts that allow you to trade options on margin, and there are also non-margin accounts that do not qualify for this.
Assuming you understand the basics of options trading, it is time to look at some specific strategies that you can use when trading revenge options in the UK.
Strategies to use when trading options in the UK
The first strategy is called a straddle. It involves buying a call option and a put option with the same expiration date and strike price. If the stock moves up or down past the strike price, one of the options will gain value while the other will lose value.
The second strategy is called a strangle. It’s similar to a straddle, but instead of buying a call and put options with the same expiration date and strike price, you buy call and put options with different expiration dates and strike prices. It gives you more exposure to movements in the underlying security, but it also increases your risk.
And finally, the third strategy is called a covered call. It involves selling a call option against shares that you already own. If the stock price rises above the call option’s strike price, the seller will have to sell their shares at a higher cost. However, if the stock cost falls below the strike cost, the seller can still keep their shares.