Options trading is a type of investment where you can make money by predicting how the stock market will move. You do this by buying options contracts which give you the right to buy or sell shares at a fixed price by a specific date.
When you buy an options contract, you pay a premium. It is the price you pay for the privilege of being able to buy or sell shares at a fixed price later. The premium will be refunded to you if the option is not exercised.
Options can be used to speculate on the movement of shares or to protect your portfolio from movements in the stock market.
Find a broker
The first step is to find a broker who offers options trading. You can search online for brokers who offer options trading or ask your current stockbroker if they offer it.
When you have found a broker, you will need to open an account. It will involve filling in some paperwork and providing identification such as a passport or driving licence.
Deposit money into your account
Once you have opened your account, you’ll need to deposit money into it. The minimum deposit amount will vary depending on the broker you choose.
You can do this by transferring it from your bank account or using a credit card.
Learn about options
Before you start trading options, it is crucial to learn about them. You must understand the different types of options contracts, how they work and what risks are involved.
There is ample information available on the internet about options trading. You can also find books and courses to help you learn about it.
Decide what type of options trader you want to be
There are two types of options traders: directional and non-directional.
Directional traders predict which stock market will move and buy options contracts expecting the share price to go up or down.
Non-directional traders trade options contracts with no directional bias; they buy contracts hoping that the option will expire worthless so they can keep the premium as profit.
Choose an option strategy
Once you have decided which type of trader you want to be, you must choose an options strategy. A strategy is a method you will use to trade options contracts.
There are several different options strategies, but the most common are:
- buying a call option
- buying a put option
- writing a covered call
- writing a naked put
Test your strategy on a demo account
Before trading options with real money, it is vital to test your strategy on a demo account. It will allow you to practice trading options without risking your own money.
Most brokers offer demo accounts so you can try out their platform and options trading.
Start trading options with real money
Once you are confident in using your strategy, you can start trading options with real money. Remember to follow your trading plan and risk management rules to protect your investment.
Monitor your portfolio
It is essential to monitor your portfolio and make sure the stocks you hold still align with your goals and risk tolerance. If they do not, consider selling the stock or buying a put option to protect your investment.
Benefits of trading options in London
Greater liquidity
The London Stock Exchange (LSE) is one of the world’s largest and most liquid stock markets. There is always a lot of trading activity, and options contracts can be easily bought or sold.
A broader choice of options contracts
The LSE offers a wide range of options contracts, giving you a broader trading choice. It includes contracts with different exercise prices and expiration dates.
Competitive pricing
The LSE has a very competitive pricing structure, meaning you can get good deals on options contracts.
Lower margin requirements
The margin requirements for trading options on the LSE are lower than other stock exchanges, making trading with smaller sums of money more accessible.
No stamp duty
When trading options on the LSE, you don’t have to pay stamp duty, a tax charged on stock trades. It can save you a significant amount of money when trading options.
You can read more about options here.