With options trading on the rise, many people are now looking at ways to diversify and improve

their holdings. Options trading for beginners can be highly intimidating: the language of options

is complex, and there seems to be a lot to know before you even get started.

Trading options can be a good way for UK citizens to diversify their portfolios. However, the

market for trading these financial instruments is highly competitive and requires substantial

capital to access many of the markets. This article will explore how amateur options traders in

the UK can develop their skills.

What is an option?

Holding an option gives you the right, but not the obligation, to buy or sell an underlying security

at a specific price in the future. The premium for this contract is set by the market and includes

factors such as implied volatility, time left until expiration and similar conditions.

Traders may use two contracts when trading options with stocks: calls and puts. Call holders

have the right to buy 100 shares of an underlying stock at a specified 'strike' price during the

lifetime of their contract, while put holders have rights to sell 100 shares before their contracts

expire.

How to start trading options

Here are the steps to help you get started trading options.

Choose a suitable underlying security

Several different conditions affect which stocks or shares will suit your strategy best. There are

several things to consider before investing in a new option contract.

Volatility shows just how much movement has been seen in that company's price throughout

history. If it hasn't changed price much during its life, there is a good chance it won't do so soon

either.

Other factors include dividend yield, which is how much of a profit has been paid to

shareholders throughout the year and beta, which shows how sensitive an investment might be

to economic changes.

Stocks from companies with high dividend yields may be a good fit for a trading strategy that

takes advantage of options expiration, while stocks which have historically seen big price moves

can provide lots of opportunities if your strategies take advantage of volatility.

Set up option trades through an options-friendly brokerage account

Some brokers have great tools for their clients to work with, while others don't offer many at all.

When working with an online platform, keep in mind that not all of them allow you to trade

options on some of the smaller, more obscure companies. If you decide to use a platform such

as this, it would be worth your while to find another that allows you to trade in these types of

stocks and shares.

Monitor your positions and manage risk

There are two main reasons you should always keep a close eye on your positions at all times,

the first being an increased chance of being stopped out by slippage, which is when a broker

fills expired orders at a price higher than expected after they have crossed the strike price. The

second reason is that volatility changes over time.

If you notice that volatility has dropped since you opened your trade, it might be time to close

the position or switch strategies. Sometimes this means buying back your option contracts

before they expire, while other times, it means the difference between trading the whole month

and choosing to cut your losses.

Finally

If you are starting and want to trade listed options, we recommend using a broker like Saxo

Bank that provides you with valuable tools that will come in handy during your research phase

and when you start trading.

Step one is to sign up for a demo account and practise different trading strategies before

investing real money. It safeguards your savings and cash flow while allowing you the

opportunity to try various strategies.