What Are Traded Options?

An Option is a derivatives contract on an underlying instrument. Options on London stocks are often referred to as 'Traded Options', but there is no difference between a Traded Option and an Option. All Option contracts work the same way; understand what a stock option is and you'll also understand how an option on a commodity product works.

Options come in two primary forms, Calls and Puts, and as most readers of this site are interested in the stockmarket we will mainly be focusing on equity options.

• A call option gives the holder the right, but not the obligation, to buy a fixed number of shares of the underlying stock at a fixed price within a fixed period of time
  
  
• For example: Reuters June £3.00 call option - The buyer of this call option has the right, but not the obligation to buy 1,000 Reuters shares at £3.00 on or before the expiry in June
  
  
• A put option gives the holder the right, but not the obligation, to sell a fixed number of shares of the underlying stock at a fixed price within a fixed period of time
  
  
• For example: BP May £5.00 Put option - The buyer of this Put option has the right, but not the obligation, to sell 1,000 BP shares at £5.00 on or before the expiry in May.
  

Note, that most UK equity options deal in 1,000 shares whereas American Options on shares are usually in 100 shares. But information such as this should always be confirmed before any trading is done.

Options Are Wasting Assets

An option only has a value for a fixed period of time. It is therefore known as a 'wasting asset’ because its value can decrease or waste away the closer it gets to its expiration date.

An option is also a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and conditions. All trading in exchange-based options such, as those on Euronext or the Chicago Mercantile Exchange (CME) are regulated by government bodies such as the Financial Services Authority (FSA).

Options Are Flexible

All options contracts on recognised exchanges (like all securities) are always tradable which means buyers and sellers are not locked into a contract until the expiry date. You can buy an option one minute, before selling it the next, or keep the position open for many months.