Are you a trader looking for stocks to trade options on? The good news is that nearly all stocks traded in the UK offer listed options. However, the bad news is that there’s no central exchange where you can find this information. We’ll give you a breakdown of the best places to find information about options trading on UK stocks.
What are stocks, and what do they offer?
A stock is a share in the ownership of a company. When you buy stock, you become a shareholder. Publicly traded companies have to offer shares to the public to raise money to grow their businesses.
For a company’s shares to be traded on a stock exchange, the company must meet specific listing requirements. For example, for a company’s shares to be listed on the London Stock Exchange (LSE), the company must have a minimum market capitalisation of £700 million. It must have been profitable for at least three out of the last five years.
What are options?
An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a set price on or before a specific date. The underlying asset can be anything from a currency to a commodity to a stock.
Options are traded on exchanges and over-the-counter (OTC). Listed options are traded on exchanges, and OTC options are traded between two parties without going through an exchange.
The vast majority of options trading in the UK are listed options. For an option to be listed on an exchange, the underlying asset must also be listed. For example, you can trade options on the FTSE 100 index, a list of the 100 largest companies traded on the LSE, but you cannot trade options on individual stocks not listed on the LSE.
What are the benefits of trading options?
The main benefit of trading options is that it gives you the ability to speculate on the future price of an underlying asset without having to buy or sell the asset itself.
For example, let’s say you think the price of gold will go up in the next month. You could buy gold bullion or ETFs, which track the price of gold, and hope that the price goes up. Or you could buy a gold call option. If the price of gold goes up, you will make a profit on your option. If the price of gold doesn’t go up, you will lose the premium you paid for the option, but you won’t lose any more than that.
Options also give you the ability to hedge your risk. For example, let’s say you own 100 shares of ABC plc. The shares are currently trading at £5 per share, and you think they might fall to £4 per share in the next month. You could buy a put option with a strike price of £4 per share. If the shares fall to £4 per share, you can exercise your option and sell your shares at £4 per share, even though that is below the current market price.
What are the risks of trading options?
The main risk of trading options is losing all of the money you invest. It is because options are leveraged products, which means that a slight movement in the underlying asset can significantly impact the option’s price.
For example, let’s say you buy a call option with a strike price of £10 per share, and the shares are currently trading at £9 per share. The option is in-the-money and will likely be exercised if the shares increase slightly. However, if the shares fall to £8 per share, the option will expire worthlessly.
Another risk to consider is that options are a wasting asset, and this means that as time goes by, the options will become less and less valuable. There is an expiration date on options, and as we get closer to that date, the option will lose value.
So, do all stocks offer listed options in the UK?
No, not all stocks offer listed options in the UK. For a stock to be listed on an exchange, the underlying asset must also be listed. For example, you can trade options on the FTSE 100 index, a list of the 100 largest companies traded on the LSE, but you cannot trade options on individual stocks not listed on the LSE.
If you want to trade options on a stock not listed on an exchange, you will need to find a broker that offers over-the-counter (OTC) options. OTC options are not traded on exchanges and are usually only available for large, well-known companies. Find out more at Saxo Markets.