Options trading involves significant risk and is not suitable for all investors. Specific complex options strategies carry additional risk. Before trading options, you must review the Characteristics and Risks of Standardised Options brochure, also known as the options disclosure document. You can review this document by visiting The Options Clearing Corporation or by contacting your broker or financial advisor, such as Saxo Bank.
Options trading is a complex process, and there are several things that Danish traders should be aware of before they begin trading listed options.
Understanding the characteristics of listed options
Listed options are derivative securities that give the holder the entitlement, but not the duty, to buy or sell an asset at an agreed-upon price on or before a specific date. An essential characteristic of listed options is that they are standardised contracts that trade on exchanges, making them very different from other options, such as OTC (over-the-counter) options, which are privately negotiated between two parties and are not standardised.
The risks involved in options trading
Before trading options, it’s essential to understand the risks involved. Options are a leveraged investment, which means they can provide the potential for large profits but also come with the risk of losses that may exceed your original investment.
Some of the key risks involved in options trading include:
- Volatility risk: This is when the underlying asset price will move unexpectedly and dramatically, which can impact the value of your option’s position.
- Liquidity risk: This is the risk that you will not be able to find a buyer for your options contract when you want to sell or that you will have to sell at a decreased price than you had hoped.
- Theta risk: This is the time decay risk associated with options, which means that as expiration approaches, the value of your options position will erode.
The different types of options
There are two main types of options – call options and put options. Call options give the holder the liberty to buy the underlying asset, while put options give the holder the liberty to sell the underlying asset.
The main difference between these two types of options is that with a call option, you are buying the entitlement to purchase an asset in the future at a predetermined price, while with a put option, you are selling the right to sell an asset in the future at a predetermined price.
Danish traders should also be aware of other options, such as index, equity, and currency options.
Index options are based on a specific index, like the S&P 500, and give the holder the liberty to buy or sell the underlying assets in that index. Equity options are based on individual stocks and give the holder the right to buy or sell shares of that stock. Currency options are based on foreign currencies, giving the holder the right to buy or sell one currency in exchange for another.
How to trade listed options
Choose an online broker
The first step when trading listed options is to choose an online broker. Many different brokers are available, so it’s essential to compare their fees and features before deciding which one to use.
Open a brokerage account
Once you’ve chosen a broker, you’ll need to open a brokerage account, where you will hold your money while trading.
Fund your account
After opening an account, you’ll need to fund it with enough money to cover the cost of your options trades.
Choose the type of option you want to trade
You can choose from various options, so it’s essential to research each before deciding.
Choose the expiration date
All listed options have a specified expiration date on which the contract expires. If the option is not exercised by this date, it will become worthless.
Choose the strike price
The exercise price is the price you can buy or sell the underlying asset if you exercise your option, known as the strike price.
Place your trade
Once you’ve chosen all the details of your options trade, you can place your trade with your broker.