A reader asked: I would like to trade FTSE 100 index options. I would also like to hedge UK shares with options. Which broker/brokers do you recommend and why?
Answer: There are effectively two choices when it comes to trading options you can opt for exchange-traded options or you can choose to trade CFDs over those options or their OTC equivalents.
Here is how to trade options.
Though because options on the FTSE 100 are cash-settled and not deliverable, that is they are a CFD themselves, in this instance, there isn’t that much difference between the two.
Compare FTSE 100 trading platforms.
If you go down the exchange-traded route the counterparty risk is between you, your broker and the options clearinghouse. Whereas, of course, if you go down the CFD route your counterparty will be the CFD broker.
However, in the event of failure retail client monies are covered up to a value of £85,000 by the Financial Services Compensation Scheme or FSCS.
In terms of hedging physical shareholdings if you are just looking for an equal and opposite offset against a drop in the monetary value of your share portfolio, in say a market downturn, then CFDs on options would likely work for you as well.
The outright logistics of putting on a hedge will be determined by the composition of your portfolio, which probably won’t match a particular index exactly. Nor will it be valued at a nice round amount. If that’s the case then hedging with options won’t be a perfect fit but with a little work, you should get to a very close approximation.
Being able to deal in fractions of an options lot may be of assistance here, that’s an advantage that CFDs on options have over their exchange traded counterparts.
*When do FTSE 100 Index Options Expire?
Don’t forget however that options have a finite lifetime and as such an options hedge won’t last forever, and may need to be periodically renewed or rolled which may incur additional costs.
Values of the FTSE 100 index options are calculated at 10:15am (GMT) on the date of expiration.
Exercise windows are between 18:10 – 18:40 London time on the last trading day.*
As to which brokers you should use, without knowing more about your circumstances, it’s not possible to say but why not have a look at our Compare Options Brokers in the UK page which will provide you with the information you need to make a choice.
Here are our tips on trading with historical data.
We have had quite a bit of interest in options trading recently and we don’t always publish Q&As that are very similar but we like to answer every question with a specific response and publish those that we think will help our users.