Ever looked at your investment portfolio and pondered whether there is a better way to invest? Or perhaps you haven’t yet started investing but would like to know what options trading is all about. If these questions ring true, this article may help you make up your mind and introduce you to the wonderful world of options trading in the UK.
What Are Stock Options?
Investors can buy or sell stocks at a fixed price on or before an expiration date with stock options. For instance, if you decide that McDonald’s (MCD) stock price will rise within two months, you can purchase an option that gives you the right to buy 100 shares of MCD at £90 per share within two months. You will make money if MCD’s stock price rises above £90 and lose your investment if it doesn’t.
How Do Stock Options Work?
In options trading, there are always ‘two sides to every story. In other words, when one party buys a contract containing these rights, another party sells the same contract containing these rights. For each call option, a ‘writer’ is obliged to sell 100 shares of the underlying stock at the fixed price if required. There is also a writer who will be obliged to buy shares at the fixed price for each put option.
The buyer wants the value of the contract to increase in value, while the seller wants it to remain stable or decrease in value. This difference of opinion about whether stock prices should rise or fall creates options trading opportunities for experienced traders—visit company website for more information.
What Are the Benefits of Options Traders for Beginners in the UK?
The most significant benefit of options trading for new traders is that it has limited risk. For instance, if I buy the MCD call option mentioned earlier in this article, my maximum loss will be just £5 per share. Even if the MCD’s stock price rises to £100 or higher within two months, I can still profit by selling the option at more than its original purchase price. Conversely, my maximum gain with options trading working out with a straightforward example is limited to £90 per share minus the premium paid on purchase (£5) = £85 per share. That being said, there are many scenarios where you could make more than £85.
Short Term Exposure to the Market
Most UK investors buy stocks for two reasons: they are either looking for capital growth (i.e. the stock price goes up) or income (i.e. dividends or interest is received). Options trading provides a third alternative that gives you short term exposure to the market without having any long term capital risk. It makes options trader an excellent tool for those who like to trade but don’t want the stress associated with holding on to a gamble.
Unlimited Profit Potential
The beauty about selling call and put options at the right time, compared to simply buying and selling stocks in the same finanace vto make a profit, is that options trading allows you to make unlimited profits when you get your analysis right. This makes it an attractive investment option for experienced individuals who know what they are doing and want to add excitement to their otherwise conservative portfolio.
Advanced Trading Opportunities
Options trading allows investors to capitalise on bullish and bearish trends within stocks, commodities, indices and currencies. As such, experienced traders can use options contracts as part of more sophisticated strategies with long term pay-offs that would otherwise be unavailable in just buying and selling the underlying assets themselves.
Lower Margin Requirements than Stocks
Finally, most brokers do not require you to deposit 100% of the funds required for options trading. Instead, the usual margin requirement is placed at 30% for clients to cover potential losses. This could be covered by using your existing cash balance or even borrowing from a third party. The low margin requirements make it easier for newbies to trade options without initially making massive deposits.