Listed options are derivative instruments that give investors the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date. In the UK, listed options are traded on the London Stock Exchange (LSE) and are regulated by the Financial Conduct Authority (FCA); find out more at Saxo markets.
There are two types of listed options: call options and put options. Listed options are an attractive proposition for UK investors for many reasons.
A high degree of flexibility
First and foremost, they offer a high degree of flexibility regarding strategies. For example, an investor could buy a call option to speculate on the future price of a particular stock or a put option to hedge their portfolio against downside risk.
Access to a wide range of underlying assets
Second, listed options provide access to a wide range of underlying assets. The LSE offers options on over 1,000 different companies and indices, exchange-traded funds (ETFs), government bonds, and currency pairs. It means that UK investors can use listed options to trade almost any asset class they want.
Third, listed options have low costs. The transaction costs associated with trading listed options are typically much lower than the costs of trading the underlying asset itself. For example, the spread on a stock option is usually just a few pence, whereas the spread on a share can be several pounds. It makes options an attractive proposition for investors who want to trade frequently or have a small amount of capital to invest.
Fourth, listed options have limited risk. Unlike other derivatives such as futures and swaps, Options are not traded on margin, so the maximum loss you can suffer is limited to the premium paid for the option. It makes them an ideal instrument for investors who want to limit their downside risk.
Listed options have many tax advantages. For example, any gains made from trading options are taxed as capital gains, which means you pay lower tax rates than other forms of income. It makes them attractive to UK investors looking to minimise their tax bills.
Another advantage of listed options is that they are highly liquid. It means that it is easy to buy and sell options and that there are always many buyers and sellers willing to trade. It contrasts with other derivatives such as futures and swaps, which can be much more illiquid.
Ease of use
The listed options are also straightforward to use. Unlike other derivatives, there is no need to set up a margin account or post collateral. You need to open an account with a broker that offers options trading. It makes them an ideal instrument for investors new to derivatives trading.
You can use it to hedge portfolios
You can also use options to hedge portfolios against downside risk. For example, an investor could buy a put option on the FTSE 100 index to protect their portfolio from a fall in the stock market. It makes them an ideal instrument for risk-averse investors.
You can use it to generate income
You can use options to generate income. For example, an investor could sell call options on a stock they already own. If the stock price falls, the option will expire worthlessly, and the investor will keep the premium. If the stock price rises, the investor will sell the stock at the strike price, making a profit equal to the premium plus any capital gains on the sale of the stock.
Access to global markets
Finally, listed options provide UK investors with access to global markets. The LSE offers options on many international indices, ETFs, and currency pairs. UK investors can use listed options to trade almost any market globally.