A reader asks: I’m Looking to sell call options on shares that I already own. I don’t want to pay fees so have looked at online brokers/services however none of them actually trade the underlying only CFD Options. Do you know of any UK brokerages that offer this service?
Answer: You have raised an interesting point here in that many options brokers do only trade CFDs on options, rather than options themselves. But one of the benefits of trading in CFDs rather than in on-exchange products is that the fee structures are often lower. That said margin trading and spread betting brokers like IG and others offer CFD options on some stocks but not on all.
One question I have is why are you set on dealing in the exchange-traded options as opposed to CFDs on them? As you can operate a buy-write strategy using either format.
A buy-write is a trade that involves selling out of the money call options against your shareholding in order to take in the option premium. Assuming the price of the underlying stock remains below the strike prices of the calls you have sold, you will be not exercised against and when the options expire, or, you buy back your short calls, you will be able to repeat the process once more.
Buy writing through an options broker is becoming an increasingly popular strategy for those investors who are looking to add income to a portfolio in an era of low or even negative interest rates.
That said the regulators in their wisdom have classified options as complex products which of course means that clients wishing to trade them have to meet certain suitability criteria so they are not for everyone.
The other benefit of covered buy-write is that the stock you own can act as collateral or margin against the short leg of the trade. However, changes to margining rules arising from Mifid II mean that the stock is no longer pledged to the option clearinghouse but instead it is segregated and collateralised at the options broker. In other words, they hold the stock and use their cash as margin at the clearinghouse. At scale that can have balance sheet implications for the broker so not everyone offers this facility
I have to agree with you that it’s not easy to find brokers who are able to trade on exchange options however two that do are Interactive Brokers and Saxo Markets.
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