Listed options trading is a popular strategy across many countries, including the UK. It offers traders a range of benefits, such as increased capital efficiency and flexibility for portfolio management. Experienced traders should know several techniques to increase their potential profits when trading listed options in the UK; each has advantages and disadvantages. This article will discuss essential techniques experienced traders should consider mastering to effectively trade listed options in the UK.
Bull call spreads
Bull call spreads are a favoured strategy traders use when trading listed options in the UK. It involves buying an at-the-money call option and simultaneously selling another out-of-the-money call option. The trader will benefit if the market is slightly bullish, as the higher-priced option’s value decreases more slowly than the lower-priced one’s value increases, resulting in a net profit. However, this technique becomes less profitable as markets become increasingly bullish, as the higher-priced option’s value decreases faster than that of the lower-priced ones. It is essential to carefully evaluate market trends before attempting this strategy.
Put ratio back spread
It is a less common but equally effective technique for experienced traders looking to trade listed options in the UK. It involves buying multiple put options and selling fewer call options, all with the same expiration date. This strategy is profitable when markets are bearish as long as the underlying stock does not fall too fast or too slow. However, potential losses increase rapidly if the market moves quickly against this position. As such, it is essential to carefully evaluate current trends before considering this strategy. Furthermore, traders must consider the option’s cost before entering this trade.
Bear spread
This approach is similar to bull call spreads but instead involves buying an at-the-money put option and simultaneously selling another out-of-the-money put option. It can be used when markets are bearish, and profits can be made if the underlying stock does not move too quickly or too slowly. However, significant losses can occur if the market rapidly fluctuates against this position, so it is essential to consider current trends before attempting this strategy. Furthermore, traders need to decide whether the cost of the options justifies entering into this trade.
Covered call
This technique is favoured by experienced traders trading listed options in the UK. It involves buying an underlying stock and simultaneously selling a call option on that same stock. This strategy can be profitable if the underlying security moves slowly. It allows traders to benefit from the premium received by selling the option and any capital gains from owning the underlying asset. However, losses will occur if the market moves against this position or the call is exercised. As such, traders must carefully evaluate current trends before attempting this strategy.
Protective put
Protective puts are favoured by experienced traders looking to trade listed options in the UK to protect their long positions in volatile markets. Traders can view Saxo Markets to learn more about the volatility of listed options. This strategy involves buying a put option to protect an existing underlying stock position in the event of a market crash. It protects against losses and downside if the market rapidly fluctuates against this position. However, there are costs associated with this strategy, and traders must carefully evaluate all potential risks before attempting this technique. Moreover, the option’s strike price must be chosen carefully to ensure protection.
Collar
The collar is a complex but effective technique for experienced traders looking to trade listed options in the UK. It involves buying an underlying stock, selling a call option against it, and buying a put option with the same expiration date. It allows traders to benefit from capital gains from owning the underlying asset and receive premiums from both options sold. However, this strategy can result in losses if the market rapidly fluctuates against them, so it is essential to carefully evaluate current trends before attempting this tactic.
In conclusion
Mastering the abovementioned techniques is essential for experienced traders looking to trade listed options in the UK. Each strategy comes with risks and costs, so evaluating the market before attempting any of these approaches is essential. By understanding market trends, traders can more effectively use these strategies to maximise profits and minimise losses.
