Listed options trading is a type of securities trading that allows investors to buy or sell options contracts that are listed on an exchange. The Netherlands exchanges that offer listed options trading are the Amsterdam Stock Exchange (AEX) and the Euronext Options Exchange (EOE).
Options contracts give the holder the entitlement, but not the duty, to buy or sell an underlying security at a set price within a specific period. The two primary options contracts are call options and put options. Call options grant the holder the entitlement to buy the underlying security, while put options give the holder the right to sell an underlying security.
Investors can take either a long or short position when trading listed options. A long position is when the investor buys an options contract, while a short position is when the investor sells an options contract.
Once these factors have been considered, investors can begin trading listed options contracts. You can explore listed options more here.
Choose an options exchange
The first step in trading listed options is to choose an exchange. There are two exchanges you can trade listed options on in the Netherlands – the AEX and the EOE.
Choose call or put options
The next step is to decide whether to trade call or put options. The one you select will hinge on your investment goals. If you think the underlying security will go up in value, you will buy a call option. If you think the underlying security will decrease, you will buy a put option.
Choose an underlying security
After deciding which type of option to trade, investors need to choose the underlying security, which can be a stock, index, commodity, or currency.
Set a price
After choosing the security, you must set a price at which the underlying security will be bought or sold, known as the strike price.
Set a period
Options contracts have a set expiration date, after which they expire and are no longer valid. Investors need to choose an expiration date that meets their investment timeframe.
Buy or sell options contracts
Once all of the previous steps have been completed, investors can buy or sell options contracts on the exchange of their choice.
Monitor your position
It is essential to monitor your position and ensure it performs as you expect it to, which includes tracking the underlying security’s price movement and ensuring that it falls within your predicted range.
Close your position
Once you’re ready to close your position, you must buy or sell the options contract on the exchange.
Benefits of trading listed options
Listed options are a very liquid market, so buyers and sellers are always willing to trade, making it easy to enter and exit a position.
Options contracts offer a high degree of flexibility, as investors can customise them to meet their needs.
Because options contracts represent a fraction of the underlying security, they give investors leverage, meaning investors can control a significant position with a small amount of capital.
Traders can use options contracts to hedge a position in the underlying security, which means they can help protect against losses.
Find opportunities in rising or falling markets
Options contracts can be profitable in rising and falling markets because investors can take a long or short position, depending on their market outlook.
Disadvantages of trading listed options
Although investors can use options contracts to hedge a position, they also come with a high degree of risk because they are a derivatives market, which means that their prices are based on the underlying security price.
Options prices can be very volatile, meaning they can fluctuate rapidly, making it difficult to predict how an options contract will perform.
Options contracts have a time limit, known as expiration, meaning they will lose value as they approach expiration, known as time decay.
Commissions and fees
Commission and fees can be high in the options market, which can eat into profits. It is essential to compare the fees of different brokers before deciding to trade.