Very few individual traders still turn to options to develop effective strategies. However, whether it is a matter of selling an option outright or combining several options in order to obtain a complex profitability scenario, investors in France are spoilt for choice between listed options and over-the-counter options.
Why trade options?
Whatever the medium used (life insurance, PEA, securities account…), the financial markets attract savers who are looking for higher returns than on a simple regulated savings account (Livret A, LEP…). However, strategies to speculate on listed securities are very limited on directional instruments such as stocks, ETFs or CFDs. Indeed, apart from betting on the rise or fall of a security, investing in the stock market might seem to be a matter of flipping a coin. However, options, another type of derivative product available from specialized brokers, allows its users to establish much more complex scenarios. Among the 4 most used strategies in options investing, selling a call (more info here) consists in speculating on the decline of a stock while keeping a margin of error.
It allows you to profit if the price of the underlying asset falls, stagnates or rises a little (but not much). On the other hand, this strategy has an unlimited potential loss and limited potential gain. Of course, some option combinations are even more interesting, as they allow you to go even further. With a Bear Call spread, you can set up a plan to speculate on the downside of a stock while keeping that famous margin of error, while limiting the potential loss. And with an Iron Condor, you can even make money if the price remains more or less stable for a predefined period of time (the option’s expiration date).
Listed Options vs. OTC Options
Listed options are centralized products that trade on regulated markets. When you buy or sell an option, you are trading with an unknown party (an individual or a professional). The volume can therefore be totally different depending on the asset you are trading, the level you choose and the expiration date. On the other hand, with an OTC option, your broker acts as the counterparty. It is therefore your broker who sets the volumes and the spread between the calls and the puts.
However, while multiples are standardized on listed options, the value of an OTC option can differ from one broker to another. Basically, the advantage of listed options is that you can trade on a transparent regulated market and therefore there is no conflict of interest with the broker who is only acting as an intermediary. On the other hand, listed options allow you to trade options with limited capital, starting at a few dozen euros. Indeed, most OTC brokers offer lower multiples, so the initial margin required to take a position is more affordable.
What are the risks of options trading?
Options are complex products that are best suited to sophisticated traders who understand how they work. Unlike other derivatives such as CFDs which offer negative balance protection for clients who reside in the EU, options can result in losses greater than the capital invested. Whether you are interested in listed or OTC options, consider practicing first via a demo account. This will allow you to test your strategies for a sufficiently long period of time before reproducing them in real life with the fruits of your savings.
Options trading is still in its infancy in France. More complex than purely directional products and sometimes riskier (naked option writing), the product suffers from its complexity and the lack of financial education of the French. Yet, options offer an effective way to hedge a portfolio or customize a market intervention strategy in great detail.