Options Trading in the UK: A Beginners Guide

Introduction to Options Trading

Options are standardized contracts that grant the buyer the right to buy or sell a stock asset at a specific price before a specific date. Options are commonly used for a combination of hedging and  speculation.

There are two primary types of options which can be traded via the Investa app:

Call Options: A call buyer takes the view that the stock price will go up. This is because calls give investors the right, but not the obligation, to buy a stock. Having the right to buy a stock is worth more when stock prices go up, so call options tends to increase in value when the underlying stock increases in price! Call options give the buyer the right to buy a stock at a specific, predetermined price within a set timeframe.

Put Options: These allow the holder to sell a stock at a specific, predetermined price within a set timeframe. If the price of a stock falls, the holder of a put option can sell the underlying stock at the predetermined price. When a stock falls in value, the right to sell it for a higher price becomes more valuable, so put options can increase in value when the underlying stock decreases in price.

Options trading  are complex instruments, but with the right education and access, we believe that for some investors it can become a powerful addition to the investor toolkit when it comes to trading financial markets.

Why Options Trading is Gaining Popularity in the UK?

Technological Advancements: In the US options trading took off once zero commission platforms were established. There has been a distinct lack of platforms that reduce commissions on options trading and use more simple interfaces in the UK. This has recently started to change, with options trading gaining popularity as a result and UK investors beginning to benefit from the types of trading tools that their US counterparts do.

Increased Financial Literacy in the UK: More individuals are educating themselves about investment strategies, typically leading to a higher demand for more sophisticated financial products like options. As demand for options grow in the UK, it’s important to remember options are complex products and not suitable for all investors.

Flexibility and Leverage: Options allow traders to control larger positions with relatively smaller capital compared to buying stocks outright.

Risk Management: Investors can use options to hedge their existing portfolios against market downturns.

What kind of stocks can I trade options on?

Another interesting factor is the kind of stocks on which options trading is popular. The US markets are much more actively participated in than UK markets. This means that there is simply more trading, more market participants, more stocks on which options can be traded and hence more options trading. These are all factors that might be referred to as increased“liquidity”. Trading options on stocks like NVDA and AAPL is much more feasible than trading options on large UK stocks like Astrazeneca and Unilever.

As a result trading options on US stocks is much more popular and feasible due to the level of market participation. As a result, Investa’s offering encompasses a universe of popular US stocks and ETFs.

Step-by-Step: How to Start Trading Options with Our App

Investa aims to make accessing the options market as simple as possible. That being said, options are complex products and not suitable for all investors. Follow these steps to begin your options trading journey:

1. Educate Yourself: Before diving in, take time to learn the basics of options trading, including key terms, strategies, and market dynamics, with our educational resources.
2. Open an Account: Register with your details and complete the necessary verification process, including taking the options quiz as part of your onboarding.
3. Fund Your Account: Deposit an initial amount that aligns with your trading goals and risk tolerance.
4. Investa’s Toolkit: Use tools like Sidekick to earn more about different options trading strategies and how to place your first trade.

By following these steps, you can build your knowledge and increase your familiarity and experience with options trading. Please remember, options are complex products and not suitable for all investors.

Common Mistakes and How to Avoid Them

While options trading offers opportunities, there are also risks to be aware of. Options by nature are higher risk products, so may not be suitable for all investors. Here are a few mistakes to watch out for:

Lack of Research: Jumping into trades without proper understanding and analysis. Always conduct thorough research before making a trade.

Ignoring Risk Management: Position sizing appropriately can help mitigate potential losses. With Investa, the maximum risk is the premium you spend on the option - so there is no danger of margin calls or unlimited losses. That way you go into every trade knowing that you cannot lose more than you spend on a trade.

Margin and Over leveraging: Using excessive leverage can amplify both gains and losses, making it crucial to trade within your means. At Investa we are conscious of this and we do not offer margin trading as a result.

By staying informed and disciplined, you can avoid these pitfalls and potentially enhance your trading success.

Conclusion

To conclude, options trading continues to gain traction globally, but the UK investor base has lacked the accessibility and commission free trading that has led to growth in other regions. Investa aims to help bridge those gaps, with an app that simplifies the options trading journey. Before trading, be sure to familiarize yourself with key terms, strategies, possible rewards and the risks with the educational content on our site and be sure that options trading is for you.