A uk stock market forum. User postings for all uk FTSE and AIM companies with postings are arranged in a bulletin board system A traded option is a tradeable financial instrument that grants its owner the right, but not the obligation, to buy or sell an asset at fixed price within a prescribed period Traders utilise two types of traded option ; Calls and Puts. Options are traded in contracts, or lots, each representing 1,000 shares of the underlying security. Shares, therefore, one is attempting to establish the cost of an individual option contract, one takes the price normally quoted in pence and multiplies it by one thousand. Traders should note that companies do occasionally reorganise their capital structure, through rights issues, stock splits etc. At any given moment any equity option will have contracts with three different expiry dates, the furthest one away being nine months. An option will have one of the following expiry cycles: It is important to know that when one contract expires another is created: Thus, when a February contract expires a new one for November is created. This is the price shares which the holder of the option has the right to buy or sell the underlying share and is fixed by LIFFE according to the following scale. Strike prices above 500p rise in increments of 50p, and above 1,500p the increments rise to p Should an option holder wish to exercise it, this may be done on any day up to and including the expiry day Option prices Traders wishing to access option prices now have several sources. On Options cable and satellite television, Sky provides some options with a 20-minute delay page The Options website offers the same service, but shows far more strike prices. In real trading you will be quoted two prices, the bid and the offer. The bid is the price at which you can sell, and the offer is the price that you will have to pay. For example, the bid-offer spread on the XYZ July call might be expressed as In-the-money or out-of-the-money If an options strike price is near the current share price it is said to be at-the-money If the strike price is much higher than the current share price in the case of calls or much lower in the case of puts it is said to be out-of-the-money If, in the case of a call, the strike price is much lower than the share price and much higher in the case of a put then the option is referred to as being in the money How are option prices decided? There are several factors that have a determining influence on the price of shares option, chiefly: The price of the underlying shares is crucial as it determines whether the trading has any intrinsic value. For example, if the option strike price is 550p and the share price is 500p, the option is said to have intrinsic value of 50p If we find that the option is priced at 75p we would say that the option, in addition to the 50p of intrinsic value, also has 25p of time value The longer the amount of time left to expiry the greater the amount of time value contained within the option. This is because there is greater opportunity for the share price to move. In cases where the strike price of the option is higher than the current share price, then the whole amount of the option premium is time value How volatile the underlying shares are will have a trading impact on the value of an option — the more volatile the share, the more expensive the option. The reason for this is trading if a share price options likely to move around a lot then it is more likely to make money for the option holder. Conversely, quiet shares have lower premiums since they are less likely to move Since share prices usually fall shares the amount of the dividend when the shares go ex-dividend, this needs to be taken into consideration when setting the option price. Interest rates do influence option prices, but trading effect is fairly negligible. If you are a speculator the chances options that you will be buying calls or puts to profit options a move in the underlying share or index. Let us suppose, for example, you reckon that Shares X. Rather than buy the ordinary shares, you might be tempted to buy a call option that will options profitable if the share behaves in the way that you anticipate. So, what can you do? One course of action would be to buy the July call option, priced at 87p. Of course, the beauty of the option lies in the fact that you are not obliged to hold it until the time of expiry — if the shares move as anticipated before expiry then the option can be sold at a profit, and this would be more appealing since the price of the option would probably still reflect some time value Now let us alter the perceived shares. Suppose that, come expiry, Corp X shares have advanced to 700p. If you had anticipated that outcome you could have considered buying a put option A put option is what you will buy if it is your intention to profit from a fall in a share price or index. Going back to our Corp X. Clearly, buying the put was the better option in this case. It might be the case that you hold a substantial amount of XYZ stock and are sitting on a good profit following a strong run. In this situation options might wish to protect your profit by buying puts against your XYZ shareholding. If you held 10,000 XYZ shares you trading choose to hedge this position through the purchase of 10 contracts of July puts at 35p What can happen? If the shares are 550p or higher at expiry then the option will expire worthless. If the shares are below 515p at expiry then the put will return a profit, and so we can confidently assert that through the purchase of the puts you have locked in a sale price of 515p for your shares. To write an option is to sell an option that you do not already own. Trading ordinary shares, there is no physical delivery of options, so once you have sold there is nothing to hand over to the market. However, writing options carries certain obligations If you write a call on a share, you effectively agree to sell it at a fixed price in the future. Conversely, if you write a put you accept the obligation to buy trading underlying shares at a fixed price. Furthermore, the writing of options requires you to lodge collateral with your broker which is then held as marginand the amount of margin you are required to deposit will be at least the minimum stipulated by the shares. This margin is recalculated daily and, shares a consequence, shares will have to deposit more than is initially required most brokers. If you hold 10,000 shares in Corp X you might decide that, with the shares at 565p, you would be happy to sell them if they advanced to 600p Rather than just waiting for the shares to achieve this price, you could write a call against your trading with a strike price of 600p, thereby agreeing to sell your shares into the market at a price of 600p if the shares are at shares above that level at expiry. In return for agreeing to sell at this level you take in a certain amount of option premium, in this case 34p. This shares of selling calls against shares already held is known as covered call writing. There are a number of crucial trading between equity and index options with which traders should be familiar. Traders should also be aware that there are two types of FTSE option, European and American. Trading key difference between the two is that the American-style options can be exercised on any business day up to and including expiry day, whereas European-style options can be exercised only on the day of expiry These options also have different strike prices: American-style strike at 50-point increments, at thepoint levels e. The European-style options also strike at 50-point increments, but at 5,475, 5,525, 5,575, 5,625 etc. While it is obvious that the options we trade options is to make money, traders should bear in mind that: Writers of options should be aware that they can lose far more than their initial investment if, particularly, they choose to write calls naked i. However, suddenly XYZ is going to merge with ABC and the shares are trading at 900p. Not trading very appealing position to be in Fundementally, it must be remembered that Traded Options are inherently risky as you do not own any underlying security. With more complicated option types and strategies traders can loose more than their initial investment. As such, trading derivatives is not suitable for new or inexperienced traders. Directory of Forex Brokers Page brings info on top uk traded options brokers, strategies for trading options techniques, traded options trading platforms, software for trading options options about buy sell indicators for traded options, technical analysis for traded options software, guide to LTOM options trader,call strategies, put strategy, shorting with options dealing london marketmakers, writing options, LIFFE market analytics. To open an Online Shares Trading Account All accounts that we recommend are fully mobile compatible and provided with in-depth market analysis, support and trading tools.
HOW to read the chart candles! Predicting the direction of the currency pair!
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