Listed options are standardised contracts that give the trader the right to trade an underlying asset at a specified price on or before a specified date without the pressure of any obligation. Listed options are traded on exchanges and can be used to speculate on the future direction of a market or hedge against risk in your portfolio.
What is volatility?
Volatility is a specific measure of how much the price of an asset fluctuates over time. Traders often use it as a proxy for risk, as assets with higher volatility tend to be riskier than those with lower volatility.
How do listed options work?
Listed options are traded on exchanges and can be bought and sold like any other security. If you think the underlying asset price will rise, you will buy a call option. If you think the underlying asset price will fall, you will buy a put option.
What are the risks of listed options?
Here are some of the risks you should be aware of:
Volatility and liquidity risk
Listed options are more volatile and less liquid than the underlying asset. So it may be not easy to find a buyer or seller when you want to trade. It can make it hard to exit a position, and you may have to accept a lower price than you wanted.
Expiration and dividends risk
Listed options have a finite life and will expire if they are not exercised before the expiration date. If the underlying asset price has not reached the strike price by expiration, the option will expire worthlessly.
Dividends can have a significant impact on listed options prices. If a company announces a dividend, the price of its call options will usually fall, and the price of its put options will usually rise.
Taxes and fees
There may be taxes or fees payable on listed options, depending on the country in which they are traded. You should check with your broker or tax advisor to see if there are any applicable taxes or fees.
Psychological risk
Trading listed options can be psychologically taxing, as you may feel like you are constantly on the verge of making or losing a large amount of money. It can lead to impulsive decisions and emotional trading, which can be very dangerous.
What are some benefits of listed options?
Here are the benefits of listed options:
Leverage
Listed options provide leverage, which means that a slight price movement in the underlying asset can significantly impact the option’s value. It can work to your advantage if the market moves in the direction you expect.
Limited risk and flexibility
Unlike owning the underlying asset outright, your risk is limited to the amount you paid for the option premium. Even if the underlying asset price falls to zero, you will not lose more than the premium you paid. Listed options give you flexibility in how you trade. You can choose to buy or sell at any time before expiration, and you are not obligated to exercise your option if you do not want to.
Choice of options and potentially high returns
Various options are available to trade, with different expiration dates, strike prices, and underlying assets. It means you can find an option that suits your investment goals. If you can predict the market’s future direction correctly, you could significantly profit from your investment.
What are some things to consider before trading listed options?
Before trading listed options, there are a few things you should consider:
- You need to clearly understand what your goals are and what your risk tolerance is.
- You need to do your research and understand how options work.
- You should use an options trading platform UK.
- Make sure you have enough capital to cover the costs of buying and selling options and the risks of holding them.
