Options contracts don’t give you the right to actually use the underlying asset. It only means exclusive permission to purchase later. (Up until the option expires).
Which means you can wait - limiting the starting cash needed, and boosting ROI once assets prove valuable.
Best Options Trading for Beginners, UK 📚
Considering day trading? When crunching your Trading Data, take time to learn your strategy. Adapt to your chosen provider. But a few key characteristics of options trading are as follows:
- More flexibility & liquidity to diversify portfolios 🤸.
- Mitigate or protect against downside risks.
- Can be much riskier than individual stocks or ETFs (an incorrect guess means losses) 📊.
- When used properly, arguably the same risk-level as with stocks.
|BEST DAY TRADING SERVICE||MINIMAL FUNDS||OTHER INSTRUMENTS||RATING|
|*1. Plus500||£100||CFDs only||★★★★★|
|2. XTB Online Trading>||None||Forex, Indices, Commodities, Stock CFDs, ETF CFDs||★★★★★|
|3. AvaTrade||£100||250+ instruments: 60+ currency pairs, major stock indices, individual shares, crypto, commodities (e.g. gold, silver, sugar, coffee), bonds, ETFs.||★★★★★|
|4. IG||£250||Trade shares, pay lower tax, 12k+ shares, 17k+ markets: Asia, US and international stocks including 70+ off-hours US stocks.||★★★★★|
*Plus500 disclaimer: 81% of retail investor accounts lose money when trading CFDs with this provider.
Note: Some of the platforms on our list, Plus500 for example, are CFD-only.
1. Plus500 - Zero Commission Options Across Many Major Asset Types
- Simple Charting
- CFDs only
- Mobile App
- UK Markets - FTSE 100
- Trade with Just £100
81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
For options traders who have graduated past beginner level who want as far-reaching options as possible. The platforms provided by Plus500 are relatively simple to use, particularly for users who want exposure across multiple markets:
- 🌴 Commodities like silver and oil
- 📺 Stock options for major firms like Amazon and Apple
- 🇬🇧 Exposure to UK marketplaces (FTSE-100)
Rather than owning options, you’re speculating on their price movements. As said earlier, UK traders will need to time their buy or sell according to the expiry date - so that the strike price is ideal. However, there is an enormous range of strike price and expiry date available.
There isn’t a dedicated options platform, or any binary options. But you’ll get a very streamlined charting layout and lots of preinstalled technical indicators and drawing tools and capabilities: an economic calendar, trade alerts, a trader’s guide, and risk management functionalities, such as g. close at profit/loss, trailing stops, guaranteed stops, etc.
Disclaimer: Illustrative prices
From a single screen, traders are able to get live price-points for these markets and execute orders from that window too.
Do this through desktop (Windows Trader) or the web-browser, known as Web-Trader. Or mobile, for Apple users, eg. Ipod Touch, IPad, iPhone and Apple Watch. The equivalent exists for Windows devices.
The interface lets you see what you pricing conditions, you simple charts, as well as reports and creating positions transactions. Do everything there; withdraw and fund straight from your trader’s account. On the reporting aspect, it lets you track past positions.
Read our Plus500 review for more details.
2. XTB Online Trading - Wide Array Of Assets
- xStation5 trading platform
- Wide array of assets
- Luxurious mobile app
- No minimum to get started
- Awesome tools and resources
So, you want to trade options, but you want an app that delivers in a lot of different asset classes. Where do you go? Well, XTB might just be the right fit for you. This company isn’t new, but in recent years, they are really building up their name and becoming leaders in the industry. They support those who want to trade the “scary” things, which includes options, right?
You have access to many different pieces of the market, including each of these:
They are widely known for their foray into the forex markets, but you aren’t limited to that capacity, and you can do a whole lot of trading outside of that industry. One of the best parts an options trader looks for is speed. Execution speed makes a substantial difference, and XTB offers great speeds across the board.
You can get in and play around with a demo account, however that is only available to you for a few weeks, so get your playing and testing done early to avoid frustration. XTB started up in 2002, and they are now a publicly-traded company.
The xStation5 platform is ideal for options trading, as are the tools and customization aspects that come along with it. On top of the trading tools, you might be impressed with the educational videos, research, and news that you can find.
They have a great mobile app, and the desktop app is just as good. You can use both or just one or the other with no issues. It’s also incredibly easy to use, which is always a winning factor. It’s also refreshing to dabble with a provider that is heavily focused on the European area, and almost caters to that space.
3. AvaTrade - Top Trader Platform for FX Options
- More than 40 Options Currency Pairs
- Get Started with Just £100
- Copy Top Options Traders
- Enormous Asset Variety
- Includes MetaTrader 4
- AvaOptions: Dedicated Options Platform
Best for Forex Options 📊
AvaFX launched all the way back in 2013. Though there is an enormous range of assets for options trading, AvaTrade is one of the best UK options brokers for forex pairs. You’ll find over 40 various currency pairs. And the choice to either purchase options via a CFD broker (with most assets) or to get options contracts directly.
This gives you more contract upside potential, as you aren’t just doing market premiums speculations. We’ve placed AvaTrader in the number 1 spot because they’re a dedicated options trading platform: AvaOptions, which is a subsidiary of the main service.
Use this on Mac and Windows, using only a browser or install the app on iPhone, iPhone, or Android phone / tablet. AvaTrade has a bunch of deep technical and fundamental capabilities, ranging from reports, analysis, tutorials, to account management.
Comes in different platforms according to the preferred interface: AvaTrade native trading platform, MetaTrader 4, or MetaTrader 5. The most popular FXOptions currently being traded on AvaTrade, at the time of this writing, are as follows:
- 💹 EUR/USD
- 💹 GBP/USD
- 💹 USD/JPY
- 💹 EUR/CHF
- 💹 EUR/GBP
As a last mention, AvaTrader allows some degree of passive options-trading, using its automated trading integrations: ZuluTrade and DupliTrade. This isn’t as user-friendly as the leading copy trading platform, eToro, but they’re one of their closest competitors.
Explore the most traded options across assets, including commodities, stocks, and bonds; discovering new opportunities by combining these with spread bets or CFDs. From oil and gold, to Meta and Amazon, AvaTrade lets you take an aggressive stance on options contracts - by buying them directly. Or to be more conservative, and purchase options via CFDs.
This suits traders who want the ability to take higher risk for more upside, or to hedge, especially for Forex currency pair markets.
4. IG Trading - Hedger’s and Less Aggressive Speculator’s Choice
- Spread Bet and CFD Options
- Deposit £250 to Trade
- Large Variety of Assets
- Both US and UK Assets
- Supports MetaTrader 4
- Commission-Free Trading
Heightened Innate Risk Management
For options traders who have some experience under their belt. IG gives you two approaches to trading options: spread betting and CFD trading. Each approach lets you speculate on options movements (premiums), instead of directly buying or selling contracts.
Which makes this quite possibly a risk manager’s preferred platform for options trading. Not buying and selling options directly can lower the risk, although the ROI does drop in return: so if you’re hedging or fine-tuning your options methods, IG may be the tool-of-choice.
As per the image above, you can also trade on share options. These are contracts that let you exchange based on the market moves of an underlying stock. Use trade options to take a position on the shift of a stock’s price: either above or below a specific point - the strike price - but only once you are at the option’s expiry point.
Please note that this specific strike point is one limitation for UK traders; US traders may be able to buy or sell throughout the lifetime of the option. However, fees are reduced for UK traders. This shares option capability was tested in IG’s offices in Dec 2021. Opening hours for UK share options are 08:00–16:30 (GMT).
The perk to using options trading is you can take a position on the markets whether things are flat, rising or falling. Trade the following across a daily, weekly, monthly, or quarterly time period with zero spread payable upon expiry:
- ☑️ Shares options
- ☑️ FX (currency pairs) options
- ☑️ Major indices options
Relative to directly buying options, IG is good for intermediate and advanced traders and hedgers who prefer lower innate risk to their portfolios, and are willing to sacrifice some upside potential for this more disciplined approach.
Best Options Trading Platforms - Guide 📚
Let’s cover the basics. This section will offer key awareness. It’s good for beginners who are still learning how options trading works. This section will also be helpful for making a buying decision on the top options trading platform to use:
What is an Options Trader?
An option is a financial instrument. It gives you exclusive rights to buy or sell a specific security, for a specific price, at a specific time. This contract is connected to an underlying asset (such as a stock).
With almost all options, these rights are exclusive. But contracts also need to be renewed every couple of years or so. Once you buy the option, you have the choice to trade the underlying asset but you’re also not obligated. If you do buy the security however, this is called “exercising the option.”
In other words, instead of a film studio buying “options” to a screenplay adaptation -- like in the Star Wars example that I used in the intro -- you’re an individual putting a claim in to have “first dibs” to a financial marketplace security (such as a stock or commodity)
A day in the life. On any given workday…
Compared to the activities of a day trader, you’re probably less concerned with how stocks vary throughout the day in price. You’ve become a curator of fine securities. Instead of reacting in the moment, you’re looking to step beyond mutual funds, stocks, or bonds. In order to maximally diversify your portfolio -- or to offset risks to it.
When aggressively speculating, the risks are high, but so are the potential rewards. Like a film studio speculating on potential winners for future review products, you're speculating on potential wonder-securities. Using options gives you a way to claim your stake for first dibs, but without fully investing upfront. You’re prepared to wait a day, or maybe years depending on your strategy and circumstances.
You could be an advanced trader, or new to options. In either case, if you’re leading your investments (putting all investment decisions in your own hands; sometimes called a DIY investor), you’ll probably have a self-directed account (below). This means you fully control your transactions and trading decisions and choices. But this doesn’t leave you helpless.
There are a lot of communities where traders come together to discuss market outlooks and different options strategies. Because you’re using a self-directed brokerage account, you have the pick of the litter of investment options, from individual stocks to funds.
Self-directed accounts give individual traders direct access to the options market. This means -- lower costs (the compound difference between pennies and thousands or hundreds of thousands of pounds); greater precision, due to a wider array of investment options; and more independence of investment decisions.
These types of accounts aren’t restricted to a small selection of securities as created by your financial adviser or employer. Instead, you can purchase individual stocks, options, bonds and even futures.
This contrasts to traditional retirement accounts, such as a private pension scheme, or 401k funds (the U.S. equivalent) -- indeed, most 401k’s offer a narrow band of mutual funds; those allowed by the fund administrator. On average, according to a BrightScope study on employee benefits, the average 401k offers only 22 different fund streams.
Relative to the 9,000+ mutual funds available, that figure represents only 1%. In fact, most plans do not let you purchase individual stocks or bonds. So self-directed brokerage accounts offer much more flexibility. You are able to buy and sell individual stocks and bonds, as well as investing in thousands of different funds.
In short, it gives you a direct link to the financial markets, letting you invest in more than just a pre-curated basket of assets.
Every platform offered on this guide is a self-directed account.
- ☑️ It’s a contractual agreement between two parties -- offering the right to buy or sell a security, at a specific time in the future, for a specific price.
- ☑️ It can be cost-efficient -- in a very simple sense, options are a kind of leverage. It’s possible to passively make proportionally much bigger ROIs from the starting capital investment.
- ☑️ Some options trading strategies can be highly risky -- the more speculative, the more so. This is particularly the case when used to directly speculate on market prices or to provide insurance to hedgers.
- ☑️ One conservative use of options is indeed by hedge funds -- to mitigate their portfolios against market variance, thereby lowering or balancing out risk exposure.
Options trading strategy example
Okay, so options are contracts that grant you the right, but not the obligation, to buy or sell an asset. You’re essentially purchasing the option to buy (or sell) the asset -- if you choose to do so, you’ve exercised the option.
As a basic example of strategy, let’s say you wanted to buy 10,000 shares of HostingData stock for £5 a share. However, either you do not have the money to secure that much, or you wonder whether the price might suddenly fall.
For this reason, you purchase the option to buy £500 worth of the stock at 50p a share. Now you can legally purchase HostingData stock for 50p a share, regardless of if the share price moves up or down; and this legal agreement expires after a month.
Suppose my HostingData company, a couple of days later, releases a financial report showing surprisingly good earnings and also says we’ve managed to invent a machine that will create free energy for all-time (spoiler alert…).
Unsurprisingly, the stock rockets up from 50p per share to £5 per share. You then exercise your option and spend £50,000 to buy £500,000 worth of shares. At which point, you sell it for a £450,000 profit (£500,000 - £50,000).
But in the opposite event, HostingData declares it is bankrupt and gets wiped out. Its stock plummets from 5 pounds per share to nothing. You can release your option, which means that you are only down £500 (instead of £50,000).
Where it gets tricky
Things get confusing when you consider the full range of options arrangements. You are not only limited to the option to buy. You can actually choose from four positions. Options let you:
- ☑️ Purchase a call: As demonstrated above, you’re simply purchasing the right (the option instrument itself) for you to buy a security -- such as a stock -- at a particular price in the future.
- ☑️ Sell a call: You purchase the right (option) for another party to buy the underlying asset at a particular price in the future.
- ☑️ Purchase a put: In this case you have the option to sell the underlying asset a particular price in the future.
- ☑️ Sell put: You sell the option to another party to sell the underlying asset at a particular price in the future.
If this sounds confusing, there's a good reason. Options have many sub-structures. When you purchase a call, or a put, your losses are capped to whatever it was you initially paid, and you have no obligation to buy or sell.
However, if you sell a call, or a put, your gain is capped to the premium, and you must release at the requested (but capped) price, if the buyer exercises the option.
Options risks & hedging strategy
Speculation risks: Now that we’ve looked into what options trading is and success rates, let’s consider risks.
To begin with, not all options are made alike in their risk profiles. For the writer (seller), your risk is different, than if you are the holder (purchaser).
Call holders: When you purchase a call, you’re obtaining the right to buy a stock at a particular price. The potential ROI of this is unrestricted, however the downside limit is capped to the premium you paid. The optimal situation here is if the price rockets up, so that you can buy it at a lower price (at the price it was when you first purchased the option, giving you high-value stocks at a reduced price).
Put holders: When you purchase a put, you’re obtaining the right to sell a stock at a particular price. Your potential benefit is limited to the difference in current market value compared to when you purchased the option (suppose you purchased the right to sell at £10 per share and it falls to £8 per share, this would mean an upside of £2 per share; the extra gets given to you, but it can’t fall below £0.00). The potential downside is capped to the premium you paid (if the value rises that high). The optimal situation is if the price plummets, so that you can sell it for more than you paid.
Call writers: By selling the call, you are granting the right for someone else to purchase. The maximum upside is whatever you paid for the option; but the possible downside has no limits. In this situation, the ideal market movement would be for the price to remain unchanging (or even for it to fall a bit) so that whoever purchases your call doesn’t exercise the option and force you to sell.
Put writers: Whenever you sell a put, you are given someone else the right to sell. The possible gains are capped at what was paid for the option, while the possible loss is capped at the stock’s value. The optimum situation is for the price to remain higher than the strike price (the target price that you want to have the option exercised) so that the buyer doesn’t exercise your option and force a sale for a higher price than the stock’s value.
To reword all of this in simpler terms, when you purchase an option, your maximum possible loss is limited to the premium paid for the option. But if you sell a call, there is unlimited possible loss; and if you sell a put, the maximum possible downside is restricted to the stock’s value.
Offsetting risk exposure
The original function of options contracts was to lower risks by using hedging -- let’s overview some of the strategies that use options to reduce risk.
- 🔰 Covered calls: This is where an individual, who is selling a call option, already possesses a substantial size of the underlying asset. Although a covered call is pretty simple as a strategy, it shouldn’t be underestimated. It can be used to defend against quite small price moves -- in temporary moments of waiting -- by offering the purchaser the gains. The tradeoff here is that, in return for these gains, in some circumstances, you are giving away some or all of your potential profits to the buyer.
- 🔰 Protective put: Using cases where you want to protect against loss downsides of owning a security -- in bullish marketplace conditions, where you want to hedge against the prospect of a bearish turn. This hedging approach involves an investor purchasing a put option at a cost, called a premium.
Puts are a bearish approach where an investor thinks an asset's price will depreciate with time. On the other hand, a protective put is where an investor still has a bullish stance on a security, but wants to hedge against possible losses and volatility.
Protective puts can be applied to currencies, stocks, commodities, and indexes and they offer some defence against downturns. In this way, a protective put is like an insurance policy because it offers downturn protection if the value of an asset depreciates.
There are other, more complicated option spreads that can be applied to specific risks, such as the chance of negative price movement. These involve quite a bit more calculation than the strategies laid out above.
How to start options trading
Options are commonly traded for equities or stocks, known as “stock options,” which are available on the exchanges such as the Dow Jones as quotes. A standard stock option quote is comprised composed of five parts, and it’s important to break down each before taking up a position:
- Stock symbols are to do with identifying the underlying asset that your options contract is bartering for.
- Strike price means the price that you successfully exercise the option.
- Expiration date is the date that the option expires.
- Type means the type of option, either a call or put.
Premium is the price-tag you purchased the option contract at itself.
Pricing vector: Intrinsic value vs time value
How options are priced is calculated essentially based on these two things: time value and intrinsic value.
Time value is a measure of how the price of an underlying security may change leading up to the option’s expiration date. Whereas the intrinsic value of an option is its upside potential, calculated as the difference between the strike price (the final price of stock will be traded at, if an option is exercised) and its current value.
But in addition, the strike price, expiration date, and stock price can influence how an option is valued. Both the strike price and stock price influence intrinsic value, whereas the expiration date directly impacts time value.
Is option trading risky?
If proper research is done before purchasing, there is arguably no more inherent risk than is involved in stocks and bonds. And if done the proper way, it can be more profitable than directly holding individual assets. But it all boils down to whether or not you did your research.
For instance, if your research indicates that a stock will shortly increase in price (before the option runs out), then you would buy a call. If the research points the other way, you’d buy a put. And if the research indicates the option will remain the same, you could sell a call or a put. Options give you, er options.
Popular options trading strategies
“Covered Calls” -- are made up of two things: you first by an underlying asset. You then sell call options for that asset. Unless the stock price goes over the strike price, profits will be made by selling call options for the asset.
“Married Puts” -- involve buying an asset and then Also buying options for an equal number of shares. This strategy provides some risk protection by Granting you permission to sell at the strike price.
The “Long Straddle” -- has a buyer purchase a call and put option for an asset simultaneously with both having the same expiration date and strike price. This strategy can be implemented when an investor is uncertain about which way prices for an underlying asset will flow.