Do you trade options on an exchange in England?

In the United Kingdom, standardised options trade on the London Stock Exchange (LSE) and its electronic platform. The vast majority of these contracts will be listed by LIFFE – a division of NYSE Euronext that have owned 99.9% of LIFFE since acquiring the company from the London Stock Exchange in April 2007 for £1 billion ($1.5 billion).

CME Group owns the remaining 0.1% of LIFFE were granted permission to develop this exchange in 2009 despite concerns expressed by European exchanges (namely Deutsche Börse) that it would give CME an unfair advantage due to their dominance in the US options market.

Products listed on the LSE

The LSE and CME will both list options on a variety of different products, such as;

1) Exchange Traded Commodities (“ETCs”) where they trade like shares (e.g. gold, silver etc.).

2) Exchange Traded Funds (“ETFs”) which track an index (e.g. FTSE 100), commodity (e.g. Brent Crude Oil) or currency (e.g. EUR/USD).

3) Over-the-counter (“OTC”) contracts that payout in cash and don’t require a purchase of the underlying asset.

4) Hybrid derivatives between ETCs and OTCs such as ETF warrants give the option holder the right to buy (or sell) an ETC.

5) Debt instruments like government bonds that can be traded by their sector name (e.g. ten years UK Government Bonds, five year German Bunds).

However, there are very few contracts available for individual stocks outside of large companies listed on the main markets of the LSE, such as Vodafone, GlaxoSmithKline and Unilever.

The reason for this is attributed mainly to legal restrictions in derivative contracts up until 2012, which contained a “lock-in” period where the investor was only able to trade these after holding onto them for at least three years. As a result, most options trading tended to occur on Indexes, currencies and commodities where liquidity was much more significant.

What are mini options?

The LSE does offer a handful of very popular mini-options on blue-chip stocks such as BP, HSBC and Vodafone. Still, these can only be traded through an intermediary such as IG Group or spread betting accounts with CMC Markets or City Index.

Even then, the price of these mini-options tends to move up and down in line with the primary shares, which is not ideal for many investors – particularly if they’re looking for protection against adverse movements on the broader market (i.e. hedging).

As a result, applications to list options on individual UK stocks outside the “ring-fenced” AIM International Market were put on hold until 2020. Both the LSE and CME Group began to focus on improving their options markets for the UK investors.

Advantages of trading options

There are several advantages associated with standardised trading options over other types of derivatives such as swaps, futures and forwards.

One of the most important factors is that they must be traded on an exchange which means that all contracts have a central price called the “settlement price” from whereto they can either rise or fall by no more than 10% in any given day – otherwise known as the “daily settlement limits”. This does give investors protection against extreme levels of volatility and create a so-called “circuit breaker” effect should prices drop too dramatically within a short space of time.

Another key benefit is that standardisation means the contract has a fixed expiry date which means they can’t “rollover” like other types of derivatives. In addition, the value of options changes in line with the value of their underlying asset – unlike swaps and forwards, where it doesn’t matter if their price collapses after entering into the contract.

In summary

Beginner traders who want to learn how to trade options UK are advised to contact a reputable online broker from Saxo Bank and start their investment journey by trading on a demo account.


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