Options are a financial derivative instrument that gives you the right, but not the obligation to purchase or sell an asset at a specified price, known as the strike price, before a certain expiry date.
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They differ from futures because there is no obligation on behalf of a trader to take delivery of an asset when the option expires. When you buy an options contract it comes with a premium — this is the price of owning the option. The premium acts a bit like insurance, you pay for the right to exercise the option in the future. Like futures, options have a limited shelf life — they have a date at which they expire.
The advantage of trading options is that they provide the potential for an investor to acquire something cheaper than the market price, or to sell something at a more expensive price than the market is trading at. There are two types of option contracts which can be bought to speculate on the direction of an asset:. Call option This gives you the right to BUY an asset at a future price. Buyers of a call option are speculating on an increase in the price of the asset. They have the right to buy the asset at the strike price of the contract. Buyers of a put option are speculating on a decline in the price of the asset.
They have the right to sell the asset at the strike price of the contract. Options are traded in a standardised format on options exchanges.
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Options trading can also take place directly with another counterparty, this is known as over-the —counter OTC. Options are frequently used by investors to help them manage the risk in their portfolios. For example, an investor with a portfolio of UK shares might buy a put option on the UK This will go up in value as the UK falls. Options can be more flexible than futures, as they come in both buy call and put sell versions, plus it comes down to the trader to decide when to exercise them. The premium paid for an option can be more cost efficient than a futures contract too.
Contract for difference
There are many different types of trading strategies that traders use to profit and hedge their risk. You can find out about some options trading strategies here. You can contact our dedicated Options Desk for more information. You can see our range of options markets here. We use cookies, and by continuing to use this site or clicking "Agree" you agree to their use. Full details are in our Cookie Policy.
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Best Options Trading Platforms
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How to trade options in the UK
While one broker may be great for trading stocks or offer a great trading platform, it might not be a top player for options. In addition to fair pricing for options, Schwab also gives you fundamental research that should prove valuable in selecting the options you want to trade. Interactive Brokers has long been regarded as a place for professionals, and with good reason. Trade Station is another broker that caters to higher-volume traders, and its pricing reflects this focus. Ally Invest is a solid choice for those looking to reduce their trading costs.