Howdy option nerds and welcome! In this short article we’ll cover options transactions, modern methods, and the nitty-gritty details between the US and UK when it comes to trading options. And don’t worry, the ‘Big Bang’ is not as explosive as it sounds. Let’s jump in!
Table of Contents
Types Of Transactions
All traded option transactions fall into one of the following categories:
A transaction whereby the buyer of an option becomes the holder of it.
A transaction whereby the seller becomes the writer of an option.
A Transaction in which the holder of an option disposes of it in the market to another buyer.
A transaction in which a writer buys back an option identical to one which he has written. Thus extinguishing his liability as a writer.
Trading And Dealing Options
In the past, to trade options, clients talked directly to their brokers. They would give specific instructions to place their trades. It was a bit cumbersome and slow.
Now, in modern times, we can trade swiftly with a few taps on our phones or clicks on our laptops. Despite the shift in how we communicate, the core trade information stays consistent. It’s now just more streamlined and accessible.
Here is the information required to make an option trade:
- The number of contracts to be bought or sold
- The class of option (i.e. the underlying security and whether it is a covered call option or a cash secured put option)
- The expiry month and exercise price of the option
- Whether the order will be open or close a position
- Whether, if the order cannot be executed immediately, it is to be entered as a public limit order and, if so, whether it is to be “good till cancelled” (GTC) or “good for the day” only (GD).
- Any other conditions attached to the order (remembering that contingent orders may not be entered as public limit orders)
How Many Shares In An Option Contract?
Traded options listed on sterling securities are quoted in pence. The minimum unit of trading is one contract, which normally represents the option on 1,000 shares of a stock.
In terms of US options quoted in dollars, a unit of trading represents the options on 100 shares.
So to recap:
1,000 shares in an option contract for UK listed stocks.
100 shares in an option contract for US listed stocks.
Please note, contract sizes might be adjusted based on factors like share capitalisations.
All orders in traded options should specify the number of contracts you want to trade, not the number of shares tied to the underlying security.
For example, if you want to trade options on 500 shares in a class which each contract represents the options on 100 shares., you should place an order for five contracts.
If you want to deal in a call and series of option at a price which is outside the current market price, you can leave a public limit order with your preferred broker.
As you, the investor, you must specify whether the public limit order is “good for the day” (GD) or “good till cancelled” GTC.
The former are automatically cancelled at the end of each trading day, whereas the latter remain open until cancelled.
Orders from the public are the only type of order accepted as public limit orders and they take priority over all other market orders.
What Are Option Trading Hours?
Trading takes place between 08.35 and 16:10.
Option Dealing Prices
The smallest permitted price fraction in traded option bargains is 1/4p for those quoted in sterling.
For those quoted in dollars, the smallest price fractions are 1/8 US dollars where the contract size is 100 shares.
For bargains on the FTSE 100 share index, the smallest fraction is 1/2p and for gilt options it is 1/32.
With regard to currency options the smallest fraction is 0.05c in respect of the Dollar/ Sterling contract and 0.01c for the Dollar/Deutschmark contract.
What Are Dealing Costs For Options?
Minimum commissions were abolished with the “Big “Bang”. All commissions are now fixed by individual brokerage firms and these vary from one broker to another.
AUTHOR'S NOTE: What is the "Big Bang"? The Big Bang, on October 27, 1986, marked the deregulation and privatization of the London Stock Exchange (LSE). This move, led by the Conservative government under Margaret Thatcher, played a pivotal role in elevating the City of London into a prominent global financial hub. After deregulation, trading volume and market capitalization on the LSE experienced significant growth. This shift eliminated fixed commissions, allowed firms to represent investors, opened the exchange to foreign companies, and introduced electronic trading platforms.