What is options trading? | Find out how to trade options - Finder UK

What is options trading?

Learn about options trading, which lets you lock in a price without the obligation to buy

What is options trading?

Options trading offers the right to buy or sell at a specific price on or before a certain date. They differ from futures in that there isn’t an obligation to buy.

The right to buy is called a “call option” while the right to sell is called a “put option”. If the price goes up and you have a “call option” then you have the opportunity to earn a large profit, if you have a “put option” then you lose the premium you paid. The opposite is also true.

You can trade options on:

  • Stocks and shares
  • ETFs
  • Currencies
  • Indices
  • Bonds

Options example

Let’s say you see a new development of flats in your local area – you think that you’d like to buy one of them, but only when they’re finished. You never know, they might choose to put carpets in the bathrooms.

You could buy a call option to purchase the home for its current value between today and four years time. It’s like a non refundable deposit for the home. Of course, the developers won’t give you this for free, but it could be in their best interests to sell you this option as it could get some initial money and might lead to a sale.

Now, say you pay £30,000 as a down payment for the flat, and three years later, the flats are done – and they didn’t put carpet in the bathrooms. If you want to, you can now purchase the property for the agreed price of £300,000.

If the area has suddenly become quite sought after, the value might have risen to £500,000, but, as you bought the option back when it was valued at £300,000, you can still have it for this price.

But, say the value has dropped and it’s now only valued at £250,000, you might not choose to use the option, as you can purchase the home for less and save yourself some money.

What’s the difference between options trading and futures trading?

At first, you might think that futures and options are exactly the same, but they’re not. The key difference between them is that with futures, you’re bound by a contract to purchase the asset at a specific price, while with options, it’s only a right, and you have a choice whether you want to do so.

Why do people trade options?

People choose to trade options as a means of making profit, to hedge risk against other investments or to speculate on price movements.

Speculation

Some people use options to wager on any potential price movements in the future. If you think the value will go up, then you might buy a stock or buy a call option. Buying a call option means that you have the chance to use leverage, so you can put down only a small amount of money, which is called the premium).

Hedging

This is what options were originally created for, and while it sounds like something you’d do to a hedge, it’s far from it.

Hedging is used to limit the risks that you are exposed to when trading, like an insurance policy for your investments. It’s a little complicated, but you can choose to buy a “put” option on a stock that you purchase – then, if the price goes against you, you can choose to sell at the agreed price. As these only offer the right to buy, you don’t have to purchase or sell when the prices work in your favour, which can help you limit your losses.

Compare investment services

Table: sorted by promoted deals first
Data updated regularly
Name Product Price per trade Frequent trader rate Platform fees Brand description
Fineco
UK: £2.95
US: $3.95
EU: €3.95
N/A
£0
Your first 100 trades are free with Fineco (T&Cs apply)
Fineco Bank is good for share traders and investors looking for a complete platform and wide offer. The minimum deposit with Fineco is £0. Capital at risk.
eToro Free Stocks
£0
N/A
£0
Capital at risk. 0% commission but other fees may apply. The minimum deposit with eToro is $200.
Hargreaves Lansdown Fund and Share Account
£11.95
£5.95
£0
Hargreaves Lansdown is the UK's number one platform for private investors, with the depth of features you'd expect from an established platform. The minimum deposit with HL is £1. Capital at risk.
Degiro Share Dealing
UK: £1.75 + 0.014% (max £5)
US: €0.50 + $0.004 per share
N/A
£0
Degiro is widely seen as one of the best low-cost share brokers, for people who are looking to trade regularly. The minimum deposit with Degiro is £0. Capital at risk.
interactive investor Trading Account
£7.99 (with one free trade per month)
N/A
£9.99 per month
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. The minimum deposit with ii is £0. Capital at risk.
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Data updated regularly
Name Product Minimum deposit Maximum annual fee Price per trade Brand description
Moneybox stocks and shares ISA
£1
0.45% and £1 monthly subscription fee (free for first 3 months)
£0
Moneybox offers a smart and simple way to invest. Sign up in minutes and start investing with £1 via their award-winning app. Capital at risk.
interactive investor stocks and shares ISA
Any lump sum or £25 a month
£119.88
£7.99
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. Capital at risk.
Nutmeg stocks and shares ISA
£100
0.75%
N/A
Nutmeg offers three types of portfolios. Choose the one that goes with your investment style. Capital at risk.
Hargreaves Lansdown stocks and shares ISA
£100
0.45%
£11.95
Hargreaves Lansdown is the UK's biggest wealth manager. It's got everything you'll need, from beginners to experienced investors. Capital at risk.
InvestEngine stocks and shares ISA
£100
0.25%
£0
Offer - £50 welcome bonus for new customers. Subject to minimum investment. T&Cs apply. Capital at risk.
Moneyfarm stocks and shares ISA
£1500
0.75%
£0
Moneyfarm helps you meet your investment goals with fully-managed portfolios designed around you. Capital at risk.
Fidelity Stocks and Shares ISA
£1000 or a regular savings plan from £50
0.35%
£10.00
Fidelity is another good all-rounder, offering a good package at a decent price. Not suited for trading shares. Capital at risk.
Legal & General stocks and shares ISA
Legal & General stocks and shares ISA
£100 or £20 a month
0.61%
N/A
Legal & General is a big financial services company which offers insurance, lifetime mortgage, pensions and stocks and shares ISAs. Capital at risk.
AJ Bell Stocks and Shares ISA
£500
0.25%
£9.95
AJ Bell is a good all-rounder for people who to choose between shares, funds, ISAs and pensions. Capital at risk.
Saxo Markets stocks and shares ISA
No minimum deposit requirement
0.12%
£8.00
Saxo Markets offers a wide access to a range of stocks, ETFs and funds. Capital at risk.
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Data updated regularly
Name Product Minimum investment Choose from Fee for a £50,000 pension pot Brand description
Interactive Investor Pension
Any lump sum or £25 a month
Over 3,000 funds
Annual fee: £239.88, fund fees: £50-500
interactive investor is a flat-fee platform, which makes it cost effective for larger portfolios. Capital at risk.
Moneyfarm Pension
£1,500 (initial investment)
7 funds
0.35%-0.75%
Moneyfarm has pensions that are matched against your risk appetite, goals and planned retirement date. Capital at risk.
AJ Bell Pension
£1,000
Over 2,000 funds
Annual fee: £125, includes fund fees
AJ Bell has two different pension options, a self managed pension and one that is managed for you. Capital at risk.
PensionBee Pension
No minimum
9 funds
Annual fee: £250-475, includes fund fees
Pension Bee is a newbie in the pension market. It helps consolidate your pension plans into one place. Capital at risk.
Hargreaves Lansdown Pension
£100 or £25 a month
2,500 funds
Annual fee: £225 (£200 cap if holding shares), fund fees included
Hargreaves Lansdown is the UK's biggest wealth manager. It's got three different retirement options. Capital at risk.
Saxo Markets Pension
Saxo Markets Pension
£10
Over 11,000 funds
No annual fee
Saxo Markets gives flexibility and control over your investment strategy. Capital at risk.
Penfold
Penfold
No minimum
4 portfolios
Annual fee: £375-455, fund fees included
Moneybox Pension
£1
3 funds
Annual fee: £225, fund fee: £60
Manage your money with an easy-to-use Moneybox app. Capital at risk.
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All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

Can I make a profit from options trading?

It’s possible to make quite a large profit from options trading if the prices work in your favour by more than the initial premium you paid.

Take the house example we used earlier. If the house valuation only raises by £30,000 when you choose to buy it then you’ll only break even as you paid £30,000 to secure the options contract.

What are the risks with options trading?

You’re at risk of losing the premium you put down, but as there’s no obligation to buy or sell, that’s the maximum risk you take. You should always make sure you only put down a premium that you can afford to lose.

Pros and cons of options trading

Pros

  • They’re cost effective. Options can be cheaper to purchase than shares, but can make you an equally large profit.
  • They carry less risk. When buying options, you’re only ever at risk of losing your premium, even if you’re wildly wrong about the future direction of a share price.
  • Extra flexibility. The ability to mimic the payoffs of specific assets, without being forced to invest huge amounts of capital upfront, gives investors more room to diversify. This makes it easier for them to create an investment strategy tailored to their specific needs.

Cons

  • If the price doesn’t move in your favour before the expiration date then you’ll lose the premium you paid.
  • Options aren’t available on all stocks and shares.

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.

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