A listed option is a type of security that gives the holder the right to buy or sell an underlying asset at a specified price within a specific period. Listed options are traded on exchanges and are regulated by governments.
Call options
A call option is a listed option that gives the holder the entitlement to buy a primary asset at a set price within a specific period. For example, let’s say you buy a call option on ABC stock with a strike price of £100 and an expiration date of December 21. Therefore, you have the right to buy ABC stock at £100 per share on or before December 21.
If the price of ABC stock goes up to £105 per share on December 20, you can exercise your option and buy the stock at £100 per share. You would then sell it immediately at the current market price of £105 per share and pocket the £5 per share difference.
Put options
A put option is a listed option that gives the holder the right to sell a primary asset at a set price within a specific period. For example, let’s say you buy a put option on XYZ stock with a strike price of £100 and an expiration date of December 21. Therefore, you have the right to sell XYZ stock at £100 per share on or before December 21.
If the price of XYZ stock goes down to £95 per share on December 20, you can exercise your option and sell the stock at £100 per share. You would buy it immediately at the current market price of £95 per share and pocket the £5 per share difference.
European-style options
European-style options are listed options that you can only exercise on the expiration date. For example, let’s say you buy a European-style call option on ABC stock with a strike price of £100 and an expiration date of December 21. Therefore, you have the right to buy ABC stock at £100 per share on December 21.
If the price of ABC stock goes up to £105 per share on December 20, you will not be able to exercise your option and buy the stock until December 21.
American-style options
American-style options are listed options that you can exercise at any time before the expiration date. For example, let’s say you buy an American-style call option on XYZ stock with a strike price of £100 and an expiration date of December 21. Therefore, you have the right to buy XYZ stock at £100 per share on or before December 21.
If the price of XYZ stock goes down to £95 per share on December 20, you can exercise your option and buy the stock at £100 per share. You would then sell it immediately at the current market price of £95 per share and pocket the £5 per share difference.
Bermuda-style options
Bermuda-style options are listed options you can exercise at certain predetermined times before expiration. For example, let’s say you buy a Bermuda-style call option on ABC stock with a strike price of £100 and an expiration date of December 21. Therefore, you have the right to buy ABC stock at £100 per share at the predetermined times before December 21.
If the price of ABC stock goes up to £105 per share on December 20, you will not be able to exercise your option and buy the stock until the predetermined time.
Exotic options
Exotic options are listed options with features that make them more complex than other types of options. For example, let’s say you buy an exotic call option on XYZ stock with a strike price of £100 and an expiration date of December 21. Therefore, you have the right to buy XYZ stock at £100 per share, but the stock price is also affected by other factors, such as market volatility.
Exotic options are more complex than other types of options and are not as commonly traded.
Read on for more on options trading UK.
