Tips to Help You Trade Listed Options
- 08 Dec 2021
The UK has a thriving options trading scene. The London Stock Exchange (LSE) offers a wide range of stocks and indices for traders, with short- and long-term expiries available.
Trading listed options in the UK is an excellent next step for investors who have already learned to trade shares or ETFs and want to gain exposure to a broader variety of assets - such as international markets - without having to open accounts in multiple countries.
As with any financial trading, you should start with a demo account and getting used to the platform before risking real capital is advisable. This way, you can make sure you are familiar with the software and understand how each element operates - including dealing types, order types, option terminology etc. You need to focus on your returns rather than how the trading platform works.
When placing spread orders (for example, buying two options at different strikes), bear in mind that they may take longer for execution if there are not many shares available at that premium/discount level. The difference between the number of options you attempt to trade and the number you execute can be attributed to different demand levels, known as "slippage".
Since 2013, UK traders have been taxed on their income from trading spread bets and financial derivatives. They are subject to a hefty 25% charge when it comes to profits - compared with just 10% in the US. The best way around this tax is by setting up a corporation or limited company so that your earnings become distributed dividends rather than salary - which will incur no additional taxation. However, as we had already seen in 2018, there may well be changes forthcoming concerning how taxes affect trading.
With most listed options, your losses can be limited to the premium paid for them, but that can prove extensive during times of volatility. For this reason, you are advised to only trade on a cash-secured basis and be prepared for periods where you may not be able to liquidate an existing position due to a lack of available capital.
If you are trading with listed options in the UK, remember that some international markets such as Russia and Japan will trade overnight due to the difference in time zones. There may also be specific restrictions on certain products as you navigate through your broker's list of available assets, so it is advisable to check that your desired trade fits within the legal framework of your chosen broker.
Currently, there are some key differences between trading listed options on US exchanges and UK markets. Fortunately for UK-based traders, many brokers are willing to accept new clients - which means you can choose one that best suits your preferences. However, you must find a broker who will provide precise market knowledge and support if anything goes wrong.
There are a few key terms you should be familiar with to ensure that any questions your broker may ask you can be answered accurately and efficiently so as not to impede your trading. Bear in mind, however, that certain terminology is specific to each marketplace - such as what "stock options" means on US exchanges compared with "listed options" on UK markets.
It might sound obvious but double-check all figures before placing an order and assume nothing: the tax implications of losing trades could prove very costly if you don't do your maths correctly.
For example, some traders may place an order for "20 numbers of XYZ", not understanding that this would equate to a £10,000 trade. The smaller the contract size for each spread bet, the better - as you can then concentrate on analysing your opportunities instead of worrying about how much risk you are taking.
You could be alerted to significant news events affecting your position by email or SMS text alerts. Still, it is always best practice to physically check if any significant changes have occurred before trading. This will help minimise unnecessary risks and prevent unexpected losses from blowing out further than anticipated/budgeted.