Options trading is growing rapidly throughout Europe. A spill-over effect from the United States, where options trading has been popular for decades, is now being seen in countries like the UK and Germany. This has led to a surge in the number of European investors searching for the best options brokers and trading platforms.
While most European online brokerages are moving towards zero-commission stock and ETF trades, most firms still charge a per-contract fee for options. While these brokers may be suitable for trading traditional securities, they may not be the best option for options traders. That’s why it’s essential to have multiple brokerage accounts to take advantage of the best pricing for each type of trade.
What are options and why are they so popular?
Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a specific price on or before a certain date. Options, like stocks, can be bought online using brokerage investment accounts.
There are four main reasons why options trading is increasingly popular:
- Leverage. Options can provide excellent results thanks to the power of leverage, which allows investors to scale a modest sum of money into many times its value.
- Hedging. Options can be used to hedge an existing position in the market. This is often done to protect against losses or to lock in profits. Options hedging is a widespread technique employed by many experienced investors.
- Higher potential returns. Since options can leverage a small amount of capital into a prominent position, they offer the potential for higher returns than traditional investments. Investors who acquire options on a stock purchased at a premium above its value will profit from the upside potential if they hold the options at the right time.
- Flexibility over stocks. Options are far more flexible than stocks. They can be used to speculate on a stock’s future direction, hedge an existing position, or create a synthetic long or short position. Options are more than just calls and puts; there are also a variety of option strategies that can be used to take advantage of different market conditions.
- Limited risk. Options are generally risky, but the most you can lose on an option trade is the option’s price. If used properly, some options strategies can be quite low-risk and may even improve your stock returns.
There is no free lunch with options trading. Like any other form of investment, there is risk involved when trading options. However, understanding the basics and using a sound options strategy can significantly reduce your risk while increasing your potential rewards.
The best options brokers available in Europe
Take a look below to learn more about how to trade options in Europe. If you just want to know which options broker is the best for Europeans, here are the top ones:
- Interactive Brokers
- Saxo Bank
The best options broker for you will depend on your trading style and preferences. It’s important to compare the features and benefits of each broker before trading. Make sure you understand the risks involved in options trading before you start.
How do options work?
Stock options are a type of derivative security. A derivative security is a financial instrument whose value is derived from something else. In the case of options, the underlying security is a stock or ETF for the most part.
When you buy an option, you purchase the right (but not the obligation) to buy or sell a security at a certain price on or before a certain date. The price that you pay for this right is called the premium. Because there is no obligation to buy or sell the security, options are considered less risky than stocks, though only if they are used correctly.
There are two standard types of options: calls and puts. Calls give the buyer the right to buy a security at a specific price, while puts give the buyer the right to sell a security at a specific price.
Suppose you decide to exercise your right to buy the security. In that case, you will purchase it at the agreed-upon price, regardless of whether the market price has moved higher or lower.
If the security moves in the opposite direction than expected, you could lose money on the trade. However, as long as you hold onto your option until expiration, you cannot lose more than what you paid for it.
On the other hand, if you decide to sell your option contract instead of exercising it, you may be able to sell it for a profit if the market price has moved in your favor.
Here’s a more simplified look at how stock options work
- Say you purchase a call option on Apple stock with a strike price of $50 and an expiration date of one month. This gives you the right to buy 100 shares of Apple stock at $50 per share anytime in the next month. Imagine the premium that you paid for this option contract is $100.
- Let’s say that one month later, the price of Apple stock has increased to $55 per share. If you exercise your option, then you would purchase the shares at $50 and immediately sell them at the current market price of $55, resulting in a profit of $500.
- On the other hand, if the price of Apple stock has decreased to $45 per share, you would not exercise your option, and the premium you paid for the contract would be lost.
This example illustrates a simple call option trade, but other types of options contracts can be traded as well.
Call and put in options trading
There are two types of options: calls and puts.
A call option gives the buyer the right to purchase a security at a certain price on or before a specific date. A put option, on the other hand, provides the buyer with the right to sell a security at a certain price on or before a certain date.
Imagine you are bullish on a particular stock and think that it will go up in value. In this case, you would purchase a call option. If the stock does indeed go up in value, then you can exercise your right to buy the stock at the lower price and sell it at the higher market price, thus making a profit.
In another scenario, you are bearish on a specific stock and think it will go down in value. In this case, you would purchase a put option. If the stock does indeed go down in value, then you can exercise your right to sell the stock at the higher price and repurchase it at the lower market price, thus making a profit.
Buying and selling calls and puts
There are four things you can do with options:
- Buy a call. When you buy a call, you buy the right to purchase the underlying security at a certain price on or before a certain date. Buying a call is similar to being bullish on a stock or ETF.
- Sell a call. When you sell a call, you are selling the right for someone else to purchase the underlying security at a certain price on or before a certain date. Selling a call is similar to being bearish on a stock or ETF.
- Buy a put. When you buy a put, you buy the right to sell the underlying security at a certain price on or before a certain date. Buying a put is similar to being bearish.
- Sell a put. Selling puts is similar to being bullish. When you sell a put, you are selling the right for someone else to sell the underlying security at a certain price on or before a certain date. A “naked” put is a put option where you do not own the underlying security. Selling a naked put is considered to be very risky. Still, it can also be very profitable if the market moves in your favor.
How to read a stock option quote
Options are listed in the form of a quote. When looking at a stock option quote, it’s essential to understand all the information included. Reading options tables with quotes can be very intimidating at first. However, there are five elements in a typical stock options quote:
- Stock symbol. The stock symbol is the identifier for the underlying security. You’ll be familiar with this if you’ve ever traded stocks.
- Expiration date. The expiration date is the date on which the option expires.
- Strike price. The strike price is the price at which you can buy or sell the underlying security.
- Option type. The option type indicates whether it’s a call or put option.
- Premium. The premium is the price you pay for the option. It’s quoted in dollars per share.
A made-up options quote for Apple stock might look like this: AAPL 220118 C 00200000. In this quote, AAPL is the stock symbol, 220118 is the expiration date (January 18, 2022), C indicates that it’s a call option, 00200000 is the strike price.
The most common way to trade stock options is in multiples of 100 shares, which is why you must multiply the contract premium by 100 to obtain the total amount you’ll need to spend to purchase the contract.
The Greeks in options
In options, the Greeks are the metrics symbolized with Greek letters used to determine an option’s price sensitivity to various risk components inherent to the options market. The Greeks are a group of computations that assess an option’s sensitivity to changes in underlying variables that influence the option price. By understanding the Greeks, options traders can make better-informed decisions about their trades.
- Delta. Measures the rate of change in an option’s price, given a $0.01 move in the underlying asset. Delta is used to guess whether an option will expire in the money.
- Gamma. Measures the rate of change in an option’s delta, meaning it tells you how much the delta is expected to change given a $0.01 move in the underlying asset.
- Theta. Measures the rate of change in an option’s price, given the passage of one day. Theta can help determine how much value an option will lose each day as it approaches expiration.
- Vega. Measures the rate of change in an option’s price, given a one percent change in volatility. Vega is not the name of any Greek letter.
- Rho. Measures the rate of change in an option’s price, given a one percent change in interest rates.
This is a heavily simplified description of the Greeks and their role in options trading. A good options broker will have advanced tools that will allow you to input different variables and see how they impact the option price. This is a valuable resource for serious options traders.
Benefits of options
Stock options can be beneficial in many different ways if you use them correctly. Primarily, options are used to speculate on the future price of a stock without putting up the total value of the shares. The main benefit of speculating on shares with options is that you only lose the premium you paid for the option. However, this does not apply if the option is sold naked.
Options can also be used to hedge against losses in a portfolio. By buying puts, you can protect your portfolio from downside risk. This is because the put option gives you the right to sell shares at a set price, regardless of how low the stock price falls.
Furthermore, options can be used to generate income. By selling covered calls, you can collect a premium each month while still owning the underlying shares. This is an alternative way to create monthly cash flow from your portfolio.
Drawback of options
Stock options can be hard to understand and trade. This is because so many variables go into pricing an option, such as the underlying stock price, time to expiration, implied volatility, and interest rates. Simple puts and calls are the easiest to wrap your head around, but there’s a lot more to learn once you start trading complex strategies.
Options can also be expensive to trade. Options contracts are typically traded in lots of 100, which means that each contract costs $100 to buy or sell. This can add up quickly if you are trading multiple contracts.
Another downside of stock options is that they are a wasting asset. This means that the value of an option declines over time as expiration approaches. This can be a disadvantage if you hold an option for too long.
The biggest danger of options trading is using them wrong. Options can lose much more than they cost you if you don’t know what you’re doing. This is typical with naked put writing, for example. You can lose your entire investment if the stock price falls below the strike price of the put option you sold.
Important options concepts
Now that we’ve covered the basics of options, let’s look at some key concepts that you need to know before trading options.
- Long and short positions. Buying calls or puts gives you a long position, while selling calls or puts gives you a short position. Being long means that you expect the stock price to go up, while being short means you expect the stock price to fall.
- In-the-money and out-of-the-money options. A call option is in-the-money when the underlying stock’s price is above the strike price. A put option is in-the-money when the underlying stock’s price is below the strike price. An option is out-of-the-money when the underlying stock’s price is above or below the strike price, depending on whether it’s a call or put option.
- The premium. The premium is the price of an option contract. It’s what you pay to buy or sell an option. In most options trade, you can also lose the premium you paid if the option expires out-of-the-money, though this doesn’t apply to naked options.
- Expiration date. This is the date on which an option contract expires. All options contracts have an expiration date, although they can also be exercised before expiration.
- Strike price. The strike price is when a put or call option can be exercised. It’s the price at which the underlying stock can be bought or sold.
- Volatility. Volatility is a measure of how much the price of a stock fluctuates. It’s important because it affects the price of options. The higher the volatility, the higher the option premium will be.
- The Greeks. The Greeks are a set of mathematical variables that help options traders determine how an option will react to changes in certain factors, such as the stock price, interest rates, and implied volatility.
These are the most important concepts to understand before trading options. However, this is by no means an exhaustive list.
American vs. European-style options
American and European options are the two most traded types of options. There are other types of options, but these are generally more risky and poorly regulated.
The main difference between American and European options is the timing of when the option can be exercised. An American option can be exercised at any time, including the expiration date. In contrast, a European option can only be exercised on the expiration date.
This has implications for how you might trade options. Suppose you buy an American-style call option on a stock currently trading at $50 with a strike price of $55 and an expiration date of two months from now. In that case, you have the right to buy shares of that stock for $55 any time over the next two months.
If you think the stock will go up above $55, you could exercise your option immediately and buy shares of the stock at $55. If the stock price falls below $55, you could let your option expire worthlessly and only lose the premium you paid for the option.
On the other hand, if you buy a European-style call option on a stock with the same parameters, you can only exercise your option on the expiration date. So, if you think the stock will go up, you would have to wait until the expiration date to exercise your option and buy shares of the stock.
How to trade options in Europe
Options trading is not as common in Europe as in the United States, but it is growing. The best way to trade options in Europe is to find an online broker that offers options trading to European clients. There are only a few local European brokerages with options available, so most options traders in Europe use online brokerages based in the United States. Canada also has a few options brokers that accept European clients.
1. Open an options trading account
You get started with options with any of the brokers on the list above. Before you begin trading, you’ll need a firm grasp of the risks and an adequate understanding of the options market. Given the complexity of options, it’s common for online brokerages to have several restrictions on who can trade options and what types of options are available.
Most online brokerages require you to open a margin account before you can start trading options. A margin account allows you to borrow money from the brokerage to buy more stock than you could afford with your initial deposit. This increases your potential profits but also increases your risk.
2. Consider your objectives
Why do you want to trade options? Are you looking to speculate on the direction of a stock or other asset, or are you looking to hedge your portfolio?
Unfortunately, many new investors are influenced by the hype around options and start trading without a clear understanding of what they are trying to achieve.
If you’re not sure, it’s best to speak with an options broker or financial advisor before starting to trade. They can help you establish realistic goals and risk parameters for your trading. It’s always a good idea to do paper trading with a demo account before risking real money. Trading with virtual funds allows you to test different strategies and learn about the options market before putting your own money at stake.
3. Pick the options you want to buy or sell
To repeat what options are about: A call option is a contract that gives you the right to buy shares of an underlying asset at a predetermined price (called the strike price). A put option is a contract that gives you the right to sell shares of an underlying asset at a predetermined price.
- An investor who thinks the price of a stock will be higher in the future will buy a call option or sell a put option.
- An investor who thinks the price of a stock will be lower in the future will buy a put option or sell a call option.
- An investor who thinks the price will remain the same or is unsure of the direction will sell options.
These are just the fundamental strategies. You can also combine these strategies to create more complex positions.
4. Make a qualified guess of the strike price
A stock option is only valuable if the stock price expires in the money. Call options are in the money when the stock price is higher than the strike price when the option expires. Conversely, put options are in the money when the stock price is lower than the strike price.
For example, let’s say you think the stock of Company X currently trading for $45 will be above $50 per share at expiration. You would then buy a call option with a strike price no higher than $50. If the stock price is above $50 at expiration, the option is said to be in the money, and you would make a profit.
You can’t just pick any strike price. Brokers list option quotes with different strike prices and expiration dates. When you purchase an option, you choose the contract you wish to trade. These quotations are provided in increments, typically $1, $2.50, $5, $10.
5. Pick your timeframe
Unlike regular stock trades, options expire. The option expiry date is the last day you can exercise the option. The time frame you choose when trading options determine the length of your contract. You can’t just pick any day. The dates are restricted to the ones available when you make a call to an option chain.
The most common time frames are:
- Daily and weekly options expire at the end of the trading day or every Friday. These generally carry the highest risk and are only for experienced traders.
- Monthly options expire on the last business day of the month and have a longer investment horizon.
- Quarterly options, which expire at the end of the quarter in which they were purchased
- LEAPS, or Long-Term Equity Anticipation Securities, has an expiration date at least a year away.
Long-term investors generally use options with quarterly or yearly expirations. A long timeframe increases the likelihood of an investment idea succeeding by giving it time to unfold. A longer expiration is also useful because it allows the trader more time to be in the money.
6. Monitor your trade
Once you’ve made your trade, all that’s left to do is monitor if it’s going for or against you. You’ll want to keep an eye on the underlying asset price and whether it’s worth exercising your option before the expiration date.
You may also want to keep an eye on the Greeks, which are financial metrics that give you a better idea of how your option trade is performing.
- Delta measures how much the option price changes when the underlying stock moves by one point.
- Gamma measures how much Delta changes as the stock price moves up or down.
- Theta is the rate of change in the option price over time.
- Vega measures how much the option price changes when there’s a change in volatility.
- Rho measures how much the option price changes when interest rates move up or down.
Monitoring your trade will help you make adjustments if needed.
Things to consider before trading options
Before you start trading options, there are a few things that you should consider. If you don’t understand how options work or how the Greeks can affect your position, you’re going to have a difficult time trading them profitably. It’s also important to be aware of the risks involved in options trading. Unlike stocks, which have a limited amount of downside risk, options have unlimited downside risk if the stock price falls to zero.
- Don’t get carried away. Online influencers and self-proclaimed traders can be very convincing, but that doesn’t mean you should follow their advice without doing your own research. Remember, the best traders don’t have YouTube channels but work quietly behind the scenes, managing their own funds or working for large institutions.
- Your investment objectives. What are you trying to achieve with your options investments? Options can be used for speculation, but they can also be used for hedging and income generation. It’s critical to have a clear understanding of your objectives before you start trading.
- Your risk tolerance. Options involve risk and can lose their entire value. You should only trade options if you’re comfortable with the potential for losses.
- The time frame you’re working with. Options can be used for short-term trading or long-term investing. If you don’t have a lot of time to devote to monitoring your positions and making timely decisions, options might not be the best investment choice for you.
These are just a few of the things you should consider before trading options. If you’re thinking about getting started, be sure to do your homework and understand the risks involved. Options can be a great addition to any investor’s portfolio, but they’re not suitable for everyone.
Options vs. other financial instruments
Options are the most popular type of derivative in the U.S. but not in Europe. In Europe, options are a relatively small market compared to CFDs, forex, spread betting, and warrants. In Europe, margin trading is generally done with real stock equity or CFDs rather than options.
This doesn’t mean that options are inferior to other financial instruments. It could be argued they are less well-understood, and that’s why they are less popular. In fact, options have many advantages over other financial instruments.
Most options are traded through exchanges or clearinghouses, which means they are not traded over-the-counter and are subject to more stringent regulation.
In most options trades, the broker is not the counterparty to the trade, though this was historically how options started. Other instruments such as CFDs or forex are traded over-the-counter, where the brokerage is often the other party to the trade.
Furthermore, options are traded with the promise of future delivery of the underlying security. This is not the case with CFDs and forex, where the trader takes a position in the market without owning the underlying asset.
Options vs. CFDs
Options and contract for differences (CFDs) are both derivative products that allow investors to speculate on the price of an underlying asset, but they work in different ways.
CFDs are banned in the United States and Hong Kong, where regulators consider them too risky for retail investors. CFDs are traded over-the-counter, which means they are not traded on exchanges but use the brokerage firm as the counterparty to the trade.
CFDs are still allowed in most European countries, but they may eventually be banned in Europe.
Similarities between options and CFDs
Options and CFDs are similar in that they derive their value from an underlying asset, such as a stock, commodity, currency, or index.
Traders can use both to go long (expect the price of the underlying asset to go up) or short (expect the price of the underlying asset to go down) on their chosen asset.
Another similarity is that options and CFDs are primarily traded on margin, which means that you only need to put up a small percentage of the total value of the trade to open a position.
Depending on the brokerage, the downside risk of a CFD trade may be unlimited, while the potential return is restricted to the difference between the contract’s opening and closing prices.
Differences between options and CFDs
The key difference between options and CFDs is that options give the holder the right, but not the obligation, to take action with respect to the underlying security. A CFD contract never delivers the underlying security, but simply replicates the security’s price movements.
In a CFD, the trader and brokerage agree to exchange the difference in the price of the CFD from when the position is opened to when it is closed, multiplied by the number of CFDs held. With an option, you have the right (but not the obligation) to trade an asset at a certain price over a set period.
An example of options vs. CFDs
Consider this example of a trade in which one side is an options contract, and the other is a CFD.
Let’s say you think Microsoft will go up from its current price of $100. So, you buy a call option with a strike price of $110 and an expiration date three months from now. If Microsoft goes above $110, you make a profit. If it goes up to $120, you make a larger profit. But if the stock price falls below $110 at any time before your option expires, you can let it expire, and the premium you paid for the option is your only loss. But, to make a profit, you’ll need to make more than the premium cost of the trade.
Say we wanted to speculate on the price of Microsoft using a CFD. We open a position at $100, and the price of Microsoft goes up to $120. Since we went long on the CFD, we made a profit equal to the price difference, multiplied by our position size. If the price of Microsoft falls below $100, we lose money and have to pay the broker the price difference. Even if your trade breaks even, you still have to pay the broker the spread or a commission to open and close the CFD trade. To make a profit, you’ll need to move by more than the cost of your position.
Is options trading better than stocks?
Investors looking for a way to limit their risk can choose options. Within certain limits, options could allow you to earn a stock-like return while spending less money, making them an alternative for keeping your risk within bounds.
Is options trading safe?
If used correctly, options can be one of the safest ways to trade. Because you have control over when and how you exercise your option, you can ensure that any losses are limited to the premium paid for the option. That is not to say that options trading is risk-free – all trading involves a risk of loss – but using options can help you manage that risk.
Isn’t options trading just gambling?
In legal terms, most countries do not consider options trading gambling, though some people may view it as such. Options trading, when taken to the extreme, is no more speculative than stock trading. The main reason options trading is not considered gambling is the an underlying asset part of the trade, not just a contract of spreads. Furthermore, call buyers, like stock investors, are taking a long position hoping that someone will buy the underlying security from them at a higher price in the future. However, like all forms of stock trading, options can carry considerable risk.
Can I trade options in Europe?
It’s possible to trade options in Europe, although it’s not yet as common as in the United States. Stock options among retail investors have only really taken off in the last few years, so there are still some hurdles to overcome. The market for options will likely continue to grow in Europe as investors become more aware of the benefits. Right now, the best places for Europeans to trade options are still with U.S.-based brokers.
What’s the difference between American and European options?
American options can be exercised at any time before the expiration date. In contrast, European options can only be exercised on the expiration date. This gives American options holders more flexibility. However, the premium for trading European options is generally lower. Still, most options traders prefer to trade American options.
Are most options American or European?
The vast majority of options traded are American options. According to Cboe Global Markets, U.S. retail investors traded around 1 million options per day in 2021. The vast majority of stock and equity options are American options, while indices are commonly represented by European options.
Can I trade options in Germany?
You can trade options in Germany, though the process may be slightly different from what you’re used to. The German options market is still relatively small compared to other markets worldwide. You’ll likely have little luck finding a local German broker that offers options trading. That said, many international brokers do offer options trading to German residents.
Can I trade options in the UK?
In the United Kingdom, spread betting has long been the most popular derivative trading because it is tax-free and does not incur stamp duty. On the other hand, options trading has grown in popularity because many investors have discovered that it can be used to hedge risk. You can trade options in the UK through a number of different brokers, but the best ones are located outside the UK.
The bottom line
Options are a popular type of derivatives that can be traded in Europe. While they may be risky, they can also provide the potential for high rewards. Options are seen as less risky than CFD (contracts for differences) trading, and as such, they have become increasingly popular with retail investors in recent years.
Interactive Brokers, DEGIRO, Tastyworks, and Saxo Bank are some of the best brokers for options trading in Europe. Each has its own strengths and weaknesses, so make sure to compare them before opening an account.
If you’re interested in options trading, make sure to do your research and practice with a demo account before putting any real money on the line. The best way to learn is by doing, so open up a demo account with one of the brokers listed above and start trading today.