Options |
Futures |
CFD's |
Spread Betting
An 'option' loosely defined gives you the punter the right to sell or purchase an asset at a point in the future at a pre-determined price. This is known as the 'strike' price. Options are incredibly versatile and offer the experienced trader many ways to make money. If you the punter decide to eventually purchase an asset at an agreed 'strike' price you will be speculating with a 'call' option. If you decide to eventually sell an asset at an agreed 'strike' price you will be speculating with a 'put' option.
Two 'styles' of options exist. Firstly an 'American' style option can be exercised by the punter at any time before its expiry. Secondly a 'European' style option can be exercised by the buyer only at maturity. The vast majority of traded options are 'American style'.
You can trade options on a whole range of financial products - bonds, futures, commodities, currencies, indices and so on. But most private punters trade options on the shares of FTSE 100 companies. Known as individual equity options they are in essence exchange traded contracts listed on the London International Financial Futures Exchange (LIFFE). Exchange traded option contracts are standardised.
FOR
- You the punter can speculate on price moves with a relatively small capital outlay. Given that an option is a leveraged investment, less capital is put at risk
- Options can have pre-determined, fixed levels of maximum potential loss and offer the potential to speculate on price moves with limited pre-determined risk.
- Options can be used as a form of insurance to protect against an asset falling in value.
AGAINST
- The downside of an option's versatility is that the relative complexity of the instrument can often serve to baffle the punter as in general they are more difficult to understand than shares.
- Unlike spreadbetting for instance, options aren't classified as betting and therefore aren't exempt from capital gains tax under current UK law.
