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ns are a suitable investment medium only for those who know what they are doing.
You do not buy or sell shares at all, but buy or sell the right to buy or sell shares at a fixed price in the future. The option period is fixed. Three periods are quoted per share, of three, six and nine months. When the first three-month period has expired, making the six- and nine-month options in three-and six-month options respectively, a new nine-month option is launched. The option to buy the shares can be taken at any time within the option period.
Alternatively the option itself can be sold. If neither happens within the period, the option is lost and so is the option money.
There are three types of option: 'call', 'put'and 'double'. A call option is the right to buy, a put option is the right to sell, a double option is the right to do either. The fee for an option (the 'option money') is usually in the order of 10 to 15% of the share price. Options are usually sold for units of 1000 shares.
An option allows the investor to make a much higher return on his investment. Whereas good share dealing could make 50% , good option dealing can make several hundred% . The downside is that you can just as quickly lose the lot. Also you cannot hold on to them while you wait for the price to recover.
An advantage is that by being such high-risk investments, they can be used to increase the risk factor in a portfolio. Options can, however, also be used to reduce a risk. For example, if we buy shares expecting them to rise in value, we can protect the risk of their falling by buying a put option for the same shares.
The traded options market started in London in 1998, and has proved very popular. In January 2024 the daily average of contracts was 43,086, compared with 14,571 just one year earlier. Growth is currently in the order of 6 to 7% a month, meaning that the volume of business doubles every eight months.
The options market has also provided a useful means of measuring how share prices are expected to move. The market (at 28 February 2024) was limited to just 45 equity shares (including all the components of the FT 30-share index), one long-term and one short-term gilt, two exchange rates (dollar/sterling and DM/sterling) and the FT SE 100 index.
Unlike share dealing, option dealing is regarded as trading and may be taxed as such under Schedule D Case I or VI. Where shares are actually bought or sold, the cost of the option may be allowed in determining any capital gain.
Traded option deals are transacted by stockbrokers as
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