June 25, 2022

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Seven things to know about listed options in London

3 min read

Listed options are traded on the London Stock Exchange (LSE) and are among the most popular derivatives traded in the city. When trading listed options in London, there are seven key things to keep in mind to succeed.

The London Stock Exchange is the largest options exchange in Europe

As this is the largest options exchange in Europe, it is essential to be aware of the different types of options traded on this exchange. The two main types of options traded are call options and put options.

Call options authorise the holder to buy a security at a specified price within a specific period. In contrast, put options allow the holder to sell the underlying security at a specified price within a specific period.

There is no central clearing house for listed options in London

Unlike other exchanges, such as the New York Stock Exchange (NYSE), there is no central clearing house for listed options in London. The two parties involved must settle all the trades through a broker or directly between themselves.

Options are traded in Pounds Sterling

All options traded on the London Stock Exchange are denominated in Pounds Sterling (GBP). It is essential to keep in mind when trading options with underlying foreign securities. For example, if you are trading a call option on the GBP/USD currency pair, the option will be denominated in GBP.

There is a minimum contract size

The minimum contract size for options traded on the London Stock Exchange is £1,000. It is different from other exchanges, such as the NYSE, where the minimum contract size is only $100. When trading options, it is essential to keep in mind as you need to have enough capital to cover the contract’s total value.

There is no central location for trading options

Unlike other exchanges, such as the NYSE, which has a physical trading floor, there is no central location for trading options on the London Stock Exchange. All trading is done electronically through brokers. When planning your trades, it is crucial to remember that you will need to have access to a broker that offers electronic trading.

Options are traded on various underlying securities

You can trade options on various underlying securities, including stocks, indexes, currencies, and commodities. It is vital to keep in mind when choosing an option to trade, as you will need to choose underlying security that is suitable for your investment objectives.

Options are subject to time decay

All options are subject to time decay, which is the loss of value of the option due to the passing of time. It is crucial to remember when trading options, as you will need to make sure that your option will not expire worthlessly.

Benefits of trading listed options

Attractive liquidity

Listed options offer investors high liquidity, as there are many options traded on the London Stock Exchange each day. It is beneficial for investors as it means that they will be able to buy or sell their options at a fair price.

Wide range of underlying securities

Investors can choose between many underlying securities when trading listed options. It is beneficial as it gives investors the ability to choose underlying security suitable for their investment objectives.

Efficient price discovery

The London Stock Exchange is efficient in price discovery, as it is the largest options exchange in Europe. Therefore, investors will be able to find the best prices for their options.

Flexibility

Options offer investors a high degree of flexibility, as they can use them for various purposes. For example, they can use options to hedge a portfolio or speculate on an underlying security’s future price.

Risk management

You can use options to manage risk, allowing investors to limit their losses while still maintaining the potential for profits. It is beneficial for investors, as it means that they will be able to protect their capital while still having the opportunity to make profits.

For information on the specific listed options you can purchase as a UK trader, you can check out Saxo Capital Markets.

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