Top Options Brokers in the UK

While options trading can seem somewhat overwhelming when first starting out, the fact is that once you have an insight into how the process works, it becomes far simpler and easier to understand.

Usually, investor portfolios utilise a range of asset classes, including stocks, bonds and mutual funds. Options act as another form of asset type, and when utilised correctly, they can offer a wide range of investment benefits.

What Are Options?

Options are a form of contract that allow the buyer of the contract to buy or sell an item at a set price.

An option buyer is charged an amount known as a ‘premium’ by the seller for the right to purchase the product at a set price. If market prices are seen as being unfavourable for options holders, they will allow the option to expire, which ensures that any losses are not higher than the premium for the product.

In comparison, it is the option sellers who take on the greatest level of risk compared to those buying the options, which is why a premium is always set.

Options tend to be split into two different options types known as ‘call’ and ‘put’ options.

When it comes to a call option, the person buying the option contract purchases the right – but not the obligation – to buy the item in the future at a set price, known as the ‘exercise price’ or the ‘strike price’ on or before the contract expires.

Whereas, when it comes to a put option, the buyer is guaranteed the right – but again, not the obligation – to sell the asset at some point in the future, on or before the end date, at the agreed price.

There are four ways that you can trade options, these are:

• Buying calls
• Selling calls
• Buying puts
• Selling puts

People who buy options are known as ‘holders’ and people who sell options are referred to as ‘writers of options’.

When it comes to options, call holders and put holders are under no obligation to buy or sell; they have the choice to use their rights how they see fit. This helps to limit the risk for buyers.

Whereas, call writers and put writers are in a position where they are obligated to sell if the option expires. This means that the risks for call and put writers tends to be higher than for call and put holders.

Key Facts:

• An option is simply a contract that gives the buyer the right to buy or sell the asset at a set price on or before a certain date.
• People tend to use options for income trading, to hedge risk or to speculate.
• Options are called derivatives as their value comes from the underlying asset being traded.

Options are part of a set of securities called derivatives.

What it’s important to understand about derivatives is the fact that the price of the derivative is derived – or dependent on – something else.

When it comes to options, these are derivatives of something known as ‘financial securities’ – the price of an option depends on the value of another asset. Some examples of this kind of derivative include Futures Investments, for instance.

Options are able to be purchased in the same way as most other asset types, through brokerage investment accounts.

Of course, it’s also important to bear in mind the fact that, like all trading, options investing involves a certain level of risk. It’s essential that the investor is aware of these risks before choosing to make their investment.

What Are the Advantages of Options Trading?

There are a range of advantages of choosing to trade options.

Options are known as being a powerful asset as they offer a fantastic route to enhancing and diversifying a person’s portfolio, this is done through increased income, protection and also leverage.

Depending on what the goal of the options trader is, there is normally a suitable options scenario that’s an appropriate fit for the trader’s goal.

For instance, in the example of needing to hedge against a stock market that is declining, options can be used as a means of limiting downside losses.

Options trading can also be used as a means of creating a regular income. In addition to this, options can also be utilised for speculative reasons, such as to wager on the direction in which a stock will go.

Key advantages of options trading include:

• Options are extremely cheap to trade
• You can get options on and off an exchange
• The risk of options is limited to the premium amount agreed
• There are high potential returns in relation to the level of risk
• There are various strategies to utilise and speculate on the volatility of the investment and movement of price

What Are the Disadvantages of Options?

As noted above, there are a wide range of advantages of options trading, with a range of financial rewards available, but it is important to understand that there are still a number of drawbacks.

Options trading offers less liquidity which can make it tricky for a trader to enter or leave the trade.

It’s also important to be aware that options trading can be more expensive than some other forms of trading, such as when compared to futures or stock trading, for instance. However, that being said, there are discount brokers who are able to offer lower rates, but for the most part, it can be a little pricey to trade options.

One of the worst things about trading options is ‘time decay’; which is where the value of an option premium begins to decrease over time.

Key disadvantages of options include:

• Options can lack liquidity
• Options can become worthless in a short time frame, quickly losing their value
• The risk is unlimited

One of the most essential factors when it comes to whether you will see options success is time; time decay can be a real issue when it comes to options trading. It’s also crucial to take the cost of trading into account when it comes to options.

How to Compare Option Brokers

Options trading has become exceedingly popular over the past few years, with more people than ever before interested in options trading.

The good news is that with the right options broker in place to help and support you, your options trading journey is sure to go smoothly.

However, determining which options trader is right for you and your needs can be difficult, which is why it’s important to know how best to compare options brokers.

There are some key factors to think about when it comes to comparing options brokers. Here are some of the key things to think about:

Are They Properly Regulated and Monitored by the FCA?

An accredited broker will usually display their FCA accreditation on their website and in any correspondence, so keep an eye out for this on broker websites.

Accreditation is important as it means that the broker adheres to a certain set of key regulations, ensuring that all trading is done fairly and legally and meets all national requirements.

Buying and Selling

It’s also important to determine whether a platform will allow you to both buy and sell options, rather than simply offering you one or the other. If you want to have the option of selling and buying then you need to source a broker who is able to offer that.

Rate of Commission

Another key factor to determine when it comes to options trading is the rate of commission that the platform charges. While some platforms charge higher rates of commission, others have lower and more affordable rates in place.

Option Strategies

It’s also important to determine if option strategies are allowed. Option strategies not only define how a trade deal will be entered and exited, but it can also help to make managing risk and the associated volatility a little easier.

There are a wide range of option strategies to choose from, and every trader has their own trading strategy.

For instance, some traders prefer to use a covered call options strategy, while other traders prefer to use a credit spread options strategy.

Some brokers don’t allow the use of certain approaches and strategies, so this is something worth looking into before selecting a broker to work with.

Extra Features

It is also important to determine what features and tools the platform has on offer for its users, such as what specific features there are in place to aid trading strategies.

What Are Paper Options?

When it comes to seeing success as an options trader, you need to be able to work quickly and effectively, never deliberating for too long on an investment opportunity.

An easy way to hone and improve your options trading skills is via paper options trading; this is a form of practice trading, which simulates a real training situation, allowing options traders to gain an insight into the process and improve and enhance their skills by doing so.

For any trader wanting to learn more about options trading – or plot out a new options strategy – paper options is a great resource to utilise.

Who Are the Top Options Brokers in the UK?

There are a wide range of choices when it comes to options brokers in the UK. However, not all brokers and platforms are born equal, so it’s worth taking the time to determine which option is the best fit for you and your trading style and requirements.

Final Thoughts

When it comes to options trading, there are a number of trading platforms available to choose from, each of which is designed to meet the needs of a different type of trader.

While some platforms offer a fantastic range of educational tools and demo platforms, others are renowned for having low fees, making trading more affordable.

WikiJob does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal capital.