Are you interested in learning more about London’s listed options? In this article, we discuss precisely that.
The London Stock Exchange (LSE) allows investors the opportunity to either buy or sell listed options, which are contracts that give them the right but not obligation to buy or sell securities at a pre-decided price within a given timeframe.
London listed options are derivatives, meaning they derive their value from another asset class to be used as tools for hedging risk exposure.
If you want an option contract on Apple shares, you first need to select how many shares you’d like to purchase through your broker and place your order with them directly.
Options work differently than traditional call or put orders because there is no fixed price until the holder closes their position by selling it back to an options writer.
They are obligated to sell the asset under contract at the option buyer’s discretion. London listed options are traded on regulated exchanges, which means there is a central limit order book for buyers and sellers to trade with each other directly.
You are guaranteed a fixed price per unit when selling London listed options even if the market moves against your position. It contrasts with over-the-counter (OTC) contracts where trades are made without an exchange involved and can thus fall into ruinous conditions of counterparty risk.
Therefore, London listed options act as insurance policies for large institutions that may not afford to take on the liability of OTC business. They offer them stability in their finances. These transactions will usually occur between London brokers and institutions or London banks.
Let’s say a London trader is bullish on Google shares. They purchase a call option with an expiry in January at $650 per share, which gives them the right but not the responsibility to buy 100 shares of the company at that price before the expiration date.
If by this time, January has come around and their prediction was correct, they could exercise their contract, buying 100 shares of Google for $650 per share when they are trading at $700, which means they just made $50 on every single share.
This type of transaction would usually occur through London-listed options exchanges like Life.
On the other hand, if London traders were bearish on Apple’s stock and saw it artificially inflated by speculative buyers, they could use London listed options to short-sell shares of the company.
Again London traders purchase a put contract which gives them the right but not obligation to sell 100 Apple shares at $650 per share before the expiration date.
If Apple’s stock price declines below this amount, London traders would exercise their option and sell 100 shares for $650 when they can get $700 on the market right now; therefore locking in a $50 loss for every share.
The London Stock Exchange (LSE) was formed in 1995 after London financial institutions collaborated with other national exchanges like Borsa Italiana to form The London International Financial Futures and Options Exchange (LIFFE).
In 2002, LIFFE was bought out by the German stock exchange Deutsche Boerse, which still runs it today. London listed options are often traded through London brokers who act as middlemen between investors and the London listed options exchanges.
London listed options are considered safer than other forms of derivatives even if they derive their value from another asset class.
London listed options are regulated by the Financial Conduct Authority (FCA), which acts as a governing body to ensure that London brokerages comply with rules put forth by Parliament.
London listed options may require higher initial deposits from investors because of their conservative nature.
London listed options typically have a high degree of liquidity. Even though London listed options come in different types, there is always someone to buy or sell them on the London exchanges at any given time.
London listed options are considered safe investments for some traders because they derive their value from other assets.
London’s financial institutions use London-listed options to protect themselves against risk during times of market volatility.
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