An options contract gives you the right - but not the obligation - to buy or sell shares on ordinary quoted companies on a future date at a price fixed at the time you buy the contract. Options giving you the right to buy are called "call options" and those giving you the right to sell are "put options". The contract gives the quantity of shares to be traded, the fixed price and the period when you can exercise the contract. Generally the option contract costs between 7 and 10 per cent of the share price. To make money, the share price has to rise or fall beyond the agreed price by more than the amount you have paid for the option contract.
Options trading on the London International Financial Futures Exchange (Liffe), is still mainly a paper-based process, and private investors can only gain access to the market through their brokers. In turn, brokers who deal in options have to be registered with the exchange and pass its exams.
This means that the small investor might not think that options trading is worth while; statistics from Liffe support that view. Around 3 per cent of Liffe's current business is "retail" or private investors. However, in the United States, retail investors account for as much as 40 per cent of the options markets.
Liffe plans changes that should make it easier and cheaper for individuals to trade. Next month, the market will move from open outcry, where traders strike bargains in the exchange's pits, to a computerised system called Liffe Connect.
According to Nick Bramley, senior marketing executive for Liffe, private investors can be put off by a poor initial experience of the market. It is not uncommon for an investor to have to hold on the phone for 10 minutes to confirm the price of a trade, while the broker instructs a trader on the market floor to secure a deal.
With Liffe Connect, brokers will have instant access to trades, so any deals will be confirmed in just a few seconds. This opens the way to internet- based trading on the market, with all the speed and convenience that brings. Commission rates should fall, especially for brokers offering execution- only services. It should also make it more economical for private investors to trade in relatively small numbers of contracts.
Until then investors interested in options will find the Liffe home pages, Liffe Net, a valuable resource. The site has an extensive private investors' centre. This includes a guide to starting out in options, and answers to frequently asked questions. Part of Liffe's equity options workbook, giving background to the market, is also on the web. The site maintains a list of private-client stockbrokers who deal on Liffe.
The site contains most of the basic information investors need before they start out on the market, but there are also details of Liffe's education seminars for investors who want to go into the subject in more depth.
Liffe also provides data services on CD Rom and through the web site; prices on the web are 15 minute snapshots.
Links: Liffe, www.liffe.com; Liffe Data, www.liffedata.com