Options Trading

If you are reading this article then it is likely that you are considering options trading, we here at Trader Hideout believe that this is an area that is not for the beginner and that even those in the know often get their fingers burned trading options, and in particular special care needs to be taken when considering UK option trading. That said if you are intent on having a dabble in trading options then we should at least give you the benefit of a brief introduction to what can be a rather scary yet at the same time highly profitable world of option trading.

In brief an option is a type of agreement that is made between two parties a buyer (holders) and a seller (writers) in respect of an underlying and when trading options there are two types of options to consider, either a call option or a put option. A call option is a financial contract that will give a buyer the right but certainly not the obligation to buy a pre-determined amount of shares of a commodity or financial instrument at an agreed price (referred to as the strike price), at an agreed point in time. A put option will give the buyer the right but no obligation to sell the underlying again at a pre-determined price and point in time. Each contract will have an expiry date and at the point of expiry the right to either buy or sell will no longer exist rendering the option valueless. Trading options also comes at a cost, the rights given to the buyer of an option will mean an option premium will be payable to the seller the value of which is dependent on certain criteria including the volatility of the underlying, the expiry date of the option contract and the price of the underlying asset.

When you are trading options you are effectively making a decision on whether you think the underlying asset share value will either increase or decrease over a period of time. To make a profit you will have to anticipate the direction of the market in a given period of time and ensure that you either sell or buy at exactly the right moment in time and if this is not done then the trading options expire and become worthless, and it is worth noting that the majority of options traded do remain unexercised.

One thing to bear in mind also when option trading is the leverage that is offered will magnify any gains or losses made and so it is possible to make a huge loss if you are not completely au fait with trading options. This leverage is of course what makes options trading extremely attractive to the experienced investor, but in contrast makes them a very tricky investment prospect of the novice trader.