Listed options are a type of financial derivative that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specific date.
Listed options trading is a popular way to participate in the financial markets without owning the underlying asset and can be used to speculate on the future direction of a market or hedge against an existing position.
Know the Types of Trading listed Options
Listed options come in two main varieties: call options and put options.
Call options give the holder the right to buy an underlying asset at a specified price on or before a specific date. In contrast, put options give the holder the right to sell an underlying asset at a specified price on or before a specific date.
1. Choose your broker
To trade listed options, you will need to open an account with a broker that offers this service. Not all brokers offer listed options trading, so it is essential to check in advance. When choosing a broker, you should also compare the fees and commissions charged for trading listed options.
2. Select the underlying asset
The first step in trading listed options is selecting the underlying asset you wish to trade. It can be many things, including stocks, commodities, currencies, and indices.
3. Choose your option type
Once you have selected your underlying asset, you need to decide whether to buy a call option or a put option.
If you think the underlying asset’s market price will rise, you will buy a call option. You will buy a put option if you think the underlying asset’s market price will fall.
4. Select your strike price
The next step is to select the strike price you would like to buy or sell the underlying asset. The strike price is when the holder of the option can buy or sell the underlying asset.
5. Select your expiry date
The expiration date is when the option expires and becomes worthless. Most listed options have expiration dates of one month or less.
6. Place your order
Once you have selected all the parameters for your trade, you can place your order with your broker. You will need to specify the number of contracts that you wish to buy or sell, as well as your chosen strike price and expiration date.
7. Monitor your position
Once your order has been filled, you will need to monitor your position to see its performance. If the market moves in the direction you anticipated, your position will gain value. If the market moves to counter you, your position will lose value.
If the option expires in the money, you will receive a payout from your broker based on the contract size and the strike price. If the option expires out of the money, then you will lose the entire premium you paid for the option.
Why should traders trade list options?
1. To speculate on the future direction
Listed options allow traders to speculate on the future direction of a market without having to own the underlying asset. It makes them an ideal tool for trading volatile markets or for taking positions when the trader is unsure of the market’s direction.
2. To hedge an existing position
You can also use listed options can also be used to hedge an existing position in the market. For example, if a trader is long on a stock, they could buy a put option to hedge against a potential fall in the stock price. It would limit their downside risk if the stock price did fall.
3. To trade with leverage
Another advantage of listed options is that they provide leverage. Meaning a slight movement in the underlying asset can lead to a significant movement in the option’s value. It can magnify profits, but it can also magnify losses.
Leverage is the key reason many traders choose to trade options instead of the underlying business assets. It allows them to take more significant positions with less capital.
4. To trade in a more controlled environment
Listed options are also attractive to traders because they provide a more controlled trading environment. With options, the trader is only risking the premium paid for the option rather than the total value of the underlying asset. It can be helpful when trading stocks or other volatile assets and could result in significant losses if traded outright.
