Options on the UK stock market are derivative instruments that get their value from an underlying asset. The most common underlying assets include stocks, commodities, and currencies. Options can be bought or sold, giving the holder the right but not the obligation to buy or sell the underlying asset at a specified price within a specific time frame.
The value of options is affected by many factors, including the underlying asset’s price, time to expiration, volatility, and interest rates. When trading options, it’s crucial to clearly understand these factors and how they can impact the value of your options’ position.
Call Options
One of the most popular options strategies is buying call options. This strategy involves buying an option that gives you the right to purchase the underlying asset at a fixed price (strike price) within a specified timeframe. Call options are typically used when investors believe the underlying asset’s price will rise.
Put options
Another popular options strategy is buying put options. This strategy involves buying an option that gives you the right to sell the underlying asset at a fixed price (strike price) within a specified timeframe. Put options are typically used when an investor believes the underlying asset’s price will fall.
Options techniques to use when the UK stock market is quiet
Quiet markets can present opportunities for those who know how to take advantage of them. Using suitable options and strategies makes it possible to retain profit even when there isn’t a lot of movement in the market. Understanding the different options and techniques is essential before attempting to use them.
The straddle
One such technique is known as a straddle. A straddle involves buying both a put and a call on the same underlying asset, with the same strike price and expiration date. This strategy can be profitable if the underlying asset’s price moves significantly in either direction, as one of the options will always be in the money.
The butterfly spread
Another popular options technique is a butterfly spread which involves buying two calls and two puts with different strike prices but the same expiration date. The butterfly spread can be profitable if the underlying asset’s price moves up or down significantly, but not by too much.
The collar
The collar is an options strategy that involves buying a put and selling a call, with the strike price of the call being higher than the strike price of the put. This strategy can protect operating profits on a long position in an underlying asset.
The covered call
The covered call is an options trading strategy involving buying and selling a call on that stock. This strategy can generate income and help to protect against losses if the stock price falls.
The naked put
The naked put is an options strategy that involves selling a put without owning the underlying asset. This strategy can be profitable if the underlying asset’s price remains relatively stable or falls slightly.
The short call
The short call is an options strategy that involves selling a call. This strategy can be profitable if the underlying asset’s price remains relatively stable or falls slightly.
What are the risks associated with using these techniques?
While these techniques can be highly successful, it’s essential to understand that they also come with risks.
For example, the straddle strategy only works if the underlying asset’s price moves significantly in either direction. This strategy will lose money if the price doesn’t move much or moves in a minimal range.
The butterfly spread is also risky, as it requires the underlying asset’s price to move up or down by a significant amount, but not too much. If the price moves too far, this strategy will also lose money.
The bottom line
Many reliable resources are available online and offline if you’re unsure which options and strategies to use. You can also speak to a financial advisor from Saxo Markets for guidance. They can help you choose the right strategy based on your goals and risk management. The right approach makes it possible to make money even when the market is quiet.
