Best Options Trading Platforms UK

My best rated options trading platforms in the UK, April 2024

1. Interactive Brokers – Best for low cost and choice of options
2. Saxo – Best for traders with a larger portfolio
3. IG – Best for forex options
4. City Index – Best for beginners and mid-level traders
5. Plus 500 – One of the best for trading options CFDs
6. AvaTrade – Best for trading platform choice
7. CMC Markets – Best for spread betting

What is options trading?

Options trading is a type of contract that gives you the right to buy or sell an asset at a specified price on or before a particular date.

So for example, if you thought that a stock was going to increase in value, you could buy an options contract on it at a fixed price now.

In return for this options contract, you’ll need to pay a premium, usually charged for each share or unit of the underlying asset that the contract covers. As it often is for stock trading, there will be a “bid” price and an “ask” price, the latter of which you’ll need to pay as your premium.

Then, if the company did increase in value, you could exercise your option on it at the lower price, allowing you to buy the stock at a cheaper value than it’s now worth.

The keyword in the definition is the word “right”, as you have the choice, not the obligation, to do so. Indeed, you are fully entitled not to make use of the price of the option contract if you no longer want to do so.

You may do this if the asset had fallen in value instead. Rather than having bought the asset for a higher price and seeing it lose value, you could allow the contract to expire and not buy shares that have subsequently dipped.

Of course, you will still have to pay the premium as agreed at the start. Even so, this may be a lower cost than the value you would have lost had you bought the asset in the first place.

In this way, options trading is almost like buying insurance on your investments, as you are protecting yourself from investments moving in unexpected directions. Instead of being exposed to this, you have a contract in place that guarantees the price you will receive for your asset.

6 key definitions you need to know when options trading

In a moment, I’ll show you an example of how an options trade works. But first, it’s important to understand these six key definitions that you’ll almost certainly come across when trading options.

Call option

With a call option, you are able to buy an asset at the agreed price before a certain date. You might do this if you thought the asset was going to increase in value.

Put option

With a put option, you are able to sell an asset at the agreed price before a certain date. In this instance, you would do this because you thought the asset was going to decrease in value.

Strike price

The strike price is the agreed price of the option contract.

Expiration date

The expiration date is the specified date in the option contract when it will expire and you’ll no longer be able to buy or sell your stock (or other asset) for the agreed price. The maximum expiration date can be anything from overnight all the way to a year, although this will vary from broker to broker.

In the money

An option contract is considered “in the money” (ITM) when the asset price exceeds the strike price before or on expiration.

Out the money

Conversely to being ITM, “out the money” (OTM) means the strike price now exceeds the price of the asset, essentially rendering the contract useless.

Examples of options trading

Now that you understand those six key terms, you can look at these examples of options trading to see how it all might work in practical terms.

Please note: these figures are not necessarily representative of what’s really happening in the market or what would happen if you placed these trades. These are purely illustrative and any profits or losses you incur could be greater or smaller than this.

An example of a call option

Firstly, consider this example of a call option.

Let’s imagine that Tesco shares are trading for £160. You’ve heard that there’s going to be a big announcement this week about the way the supermarket is trading, which you think will drive Tesco shares up to £200 by the end of the month.

So, rather than buying shares now, you buy a call option on Tesco shares with an expiration date of 30 days. You’re given a strike price of £170, meaning you’ll have the right to buy Tesco shares at this price no matter what happens.

You find Tesco shares on your options trading platform and see that the “ask” price is £3. As a single contract typically represents 100 shares, that means your premium is going to be £300.

Over the next 30 days, Tesco shares do indeed reach £200. So, you exercise your right lined out in the contract and make the purchase at the £170 strike price – making the contract “in the money”.

That means you buy shares that are worth £20,000 for £17,000, netting you a tidy return of £3,000. Meanwhile, your outgoings are just £300 for the premium, giving you total gains of £2,700.

Now consider what would have happened if your prediction for Tesco shares had been wrong. Rather than rising to £200, imagine they fall to £100. Your contract is now “out the money”, as the asset price is below the strike price.

If you exercise your call option for 100 shares at £170, totalling £17,000, your shares would now be worth £10,000 – a loss of £7,000.

Fortunately, you are not obligated to exercise the call option. That means you can let this expire without buying Tesco shares. In this instance, while you lost the £300 you paid for the call option, you insulated yourself from losing value on the entire investment.

An example of a put option

Now let’s see how a put option might work. With a put option, you’re protecting yourself against falling prices.

In this case, imagine that you already have 100 Tesco shares, which you bought for £160 (£16,000 in total). However, you now think there’s a chance your shares will fall to be worth £100 each, or £10,000 in total, by the end of the month.

So, you purchase a put option with a strike price of £160, expiring in 30 days. This time, the premium ask price was £5, totalling £500 for all the shares.

As you predicted, the shares fall in value to £100. Without your option contract, you would have lost £6,000 on your investment, as your 160 shares worth £16,000 would now only be worth £10,000.

Instead, your put option allows you to sell at the agreed strike price of £160. That means you won’t lose value on your initial investment — just the £500 you had to pay to take out the put option.

Conversely, if Tesco shares rise to £180, your investment is now worth £18,000 – a profit of £2,000. In this case, you don’t have to exercise the put option, as it is not an obligation.

So, you then lose the £500 from a put option you no longer need, giving you total returns of £1,500.

In this instance, it was very much like insurance: you protected yourself and your investment from losses, paying a premium in return.

You can spread bet or trade CFDs on options contracts

Rather than taking out options yourself, you can spread bet or trade CFDs on them. Indeed, some investment platforms will exclusively offer access to options through these derivatives.

Brokers that allow you to do this include:

• City Index
• IG

Please remember: CFDs and spread betting are complex financial instruments and you may get back less than you invested due to leverage. Your broker is obligated to tell you how many retail investor accounts lose money when trading CFDs with them, so take note of this figure as it indicates just how much risk you are taking on.

You can sell an options contract to another buyer

Alternatively, rather than exercising the option you have taken out in the event that your speculation was correct, you are also free to sell options contracts before the expiration date.

For example, if you bought a call option on a stock that subsequently rises in value, you could sell the option for a premium to another buyer before it expires.

The value of an options contract often declines the closer it gets to expiry. So, if the underlying asset has not moved or even shifted in the wrong direction relative to the contract, you could look to sell it first.

This offers you another way to make money trading options, other than exercising the right you have to buy at a certain price. You could even speculate on the value of assets and take out options contracts accordingly, selling the contract for more than you paid for it to investors who want to buy the asset at the strike price in your contract.

What causes options to rise or fall in price?

There are many factors that can cause options to rise or fall in value, but three common ones include:

• Price movements of the underlying asset – the value of the contract will vary depending on the performance of the underlying asset. For example, if the option is for a stock that has risen in value, the contract will likely increase in value too.
• Time to expiration – generally, options will lose value the closer the contract moves towards expiry.
• How volatile the underlying asset is – more volatility means greater risk for the contract issuer. As a result, this will affect how much the contract is issued for, and what it’s worth as the asset rises and falls in value.

Assets you can access through options trading

You can trade options on a huge variety of trading instruments across the financial markets. Below are just a handful of the different assets you can trade:

• Stocks and shares
• Funds, such as index and mutual funds
• Commodities, such as oil
• Metals, such as gold and silver
• Forex

With such a wide variety of assets available, this can make options trading a flexible investment strategy.

Options trading strategies

Now that you know what options are and how they work, you might be wondering about some of the strategies you can use to trade on them. Read about four options trading strategies below.

Remember: these are general strategies, not personalised recommendations. If you want to become an options trader, you’ll need to develop a trading strategy that works for you.

Covered call

One of the most popular options strategies, a “covered call” involves buying a certain asset and then selling a call option to another investor on the same one.

You might do this if you thought that the price of your asset was going to remain stable in the short term, and were looking to generate a small return from the premium while you wait for it to do so. It also protects against the underlying asset losing value, as you receive the premium even if it does.

Of course, the risk here is that the asset does increase in value and your buyer exercises their option. In that case, you would have to sell your asset to them for the strike price.

Married put

This options strategy involves buying an asset and then buying a put option of equal value on that asset.

As I mentioned earlier, this is comparable to insurance, protecting yourself from short-term losses by ensuring you have an option to sell at the original price if an asset you think will rise in value actually decreases instead.

Long straddle

With a long straddle, you buy a put option and a call option on the same asset with the exact same strike price and expiration date.

You would do this if you thought that an asset was going to move one way or another, but weren’t sure which way. By doing so, you’d be hoping that returns, either positive or negative, will outweigh the premiums you pay for the options.

Pros and cons of options trading

Having trouble deciding whether options trading is right for you? I’ve collated a few short pros and cons to help you weigh up your decision.

What are the advantages of options trading?

• Your risk is set from the start when buying options

One of the most useful features of an options contract is that your risk, and consequently the maximum amount of money you can lose, is set from the start.

The contract issuer must honour the agreed strike price. So, regardless of how an asset moves, the ability to exercise your option means the maximum you can lose on a trade is set at the premium of the contract.

• Access a wider range of investments

With options, you are speculating on the future value of an underlying asset before you’ve actually purchased it.

This means you can access the potential value of an underlying stock, fund, bond, commodity, or whatever asset it is, without actually having to put your money in the market.

What are the disadvantages of options trading?

• Options trades are complex instruments

Options trading is complex, with so many concepts and different pieces of jargon that you need to understand.

As a result, it may only be suitable for intermediate and advanced traders who fully understand how to trade.

Many brokers may only give you access to options trading once you have proved that you understand how these work.

• Leverage could see you exposed to greater losses

Depending on which broker you choose, you may have access to leverage with your options trades.

While this does afford you the ability to make larger trades with the potential for greater gains, it also means any losses you incur will be magnified too.

Make sure you understand the risk that leverage can present before you invest.

Best Options Trading Platforms UK FAQs

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

CFDs are complex instruments and more than half of retail investor accounts lose money when trading CFDs. Please make sure that you know these risks before you start trading and that you’re aware there’s a high chance of losing money rapidly on your investment.