Anyone wanting to invest in the London markets has a range of options. One option is to trade in the listed options market. This article outlines what the listed options market is, how it works, and what you need to know before trading.
What is the listed options market?
The listed options market is a market where derivatives are traded. These derivatives are financial instruments that derive their value from an underlying asset. The underlying asset can be shares or commodities, or even currencies.
The most common type of derivative traded on the listed options market is an option. An option allows the trader to buy or sell an underlying asset at a set price on or before a specified date.
Options are traded on several different exchanges in London, including the London International Financial Futures and Options Exchange (LIFFE), and the London Metal Exchange (LME).
How does the listed options market work?
The listed options market works similarly to other markets, such as the stock market. When you buy an option, you effectively buy a contract that allows you to sell or buy an asset at a specific, pre-determined price on or before a particular date.
If the underlying asset’s price moves in the direction you have predicted, then your option will be ‘in’ the money, and you will make a profit. If the price moves against you, then your option will be ‘out of’ the money, and you will make a loss.
How to trade on the listed options market
To trade on the listed options market, you will need to open an account with a broker. You will also need to understand the options market and how it works before you start trading.
It is important to remember that options are a risky investment, and you can lose money if you don’t know what you’re doing. If you’re not sure about something, it’s always best to speak to a qualified financial advisor before making any decisions.
Strategies for trading listed options
There are a few strategies that you can use to trade listed options. Some of the most common include:
- Buying calls and puts involves buying an option to profit from the underlying asset price changes.
- Hedging is where you buy an option to protect yourself against changes in the underlying asset price, such as shares or commodities.
- Spread betting, offered by some brokers, allows you to profit from rising and falling markets.
The benefits of trading listed options
There are several advantages to trading listed options. These include:
- You can trade options on many underlying assets, including shares, commodities, and currencies.
- The options market is highly liquid, which means there is always someone willing to buy or sell an option.
- Traders can use options to hedge against other investments, which reduces the overall risk of your portfolio.
- You can use leverage to control a more prominent position than you could with the underlying asset alone.
What are the risks of trading listed options?
As with any investment, there are risks involved in trading listed options. These include:
- The underlying asset price can move against you, meaning you make a loss on your investment.
- Options are a leveraged investment, which means you can lose more money than you invested if the market moves against you.
- The options market is volatile and can be subject to sharp movements, making it difficult to predict what will happen next.
Finally
Before you start trading listed options, you must understand these risks and make sure you’re comfortable with them. If you’re not sure about something, it’s always best to speak to a qualified financial advisor from a reputable broker such as Saxo Bank before making any decisions.
