Options for beginners (UK)

A right on one side, an obligation on the other

A listed option is a standard contract between two parties who never meet. The buyer pays a premium for a right; the seller takes the premium and the matching obligation. Everything on the strategy pages is built from that exchange.

The buyer, called the holder, gets the right to buy (a call) or to sell (a put) a fixed quantity of an asset at a fixed price, the strike, until a fixed date, the expiry. The seller, called the writer, receives the premium and takes on the obligation: to sell at the strike if a call is exercised against it, or to buy at the strike if a put is. Using the right is exercise; being on the receiving end of it is assignment. The holder chooses whether and when; the writer finds out afterwards.

Four positions follow from that, priced here on BP's October series on Monday 17 August 2026, with BP at a model 530p. BP is used as a model underlying throughout this page; this is not a view on BP.

The nearest everyday parallel is an option agreement on land. A developer pays a landowner a fee for the right to buy a field at an agreed price within, say, five years. If planning permission arrives and the field is suddenly worth far more, the developer buys at the old price; if it never comes, the developer walks away and the landowner keeps the fee. UK tax law puts the land option and a listed option under the same section: TCGA 1992 s144 makes granting any option a disposal in its own right, and s144(7) extends the same treatment to a deposit forfeited when a purchase is abandoned.

A listed option differs from the land deal in four ways that shape the rest of this page. Its terms are standard, so one BP October 530 call is interchangeable with every other. It trades on an exchange, so a holder can sell the right instead of using it. A clearing house (ICE Clear Europe for UK contracts, the Options Clearing Corporation in the US) stands between the two sides, so neither relies on the other's credit. And the writer's obligation is secured by collateral the broker holds: cash, the shares themselves, or margin.

Contract sizes: what one contract is worth in pounds

Strikes and premiums are quoted per share, or per index point. The contract size, or multiplier, turns that quote into money, and it varies by market far more than most guides admit. The same 24.00p premium is £240.00 on a standard ICE contract and £24.00 on a mini.

The 100-share UK contracts are recent. From 8 December 2025 ICE listed a separate mini option on 22 large UK names (ICE Futures Europe Circular 25/123), among them Tesco, HSBC, Shell, GSK, Rolls-Royce, Barclays, AstraZeneca and Unilever, but not BP. The standard contract on those names is still 1,000 shares, and so are the new standard series ICE added the same day, such as Beazley. A mini is listed on ICE; whether a particular UK broker offers it, and whether it shows a two-way price on the day, has to be confirmed with the broker. We could not confirm either for Interactive Brokers or Saxo (checked 26 September 2026). One figure on ICE's own mini pages can mislead: they print the tick as "0.25 pence per share / £2.50", but £2.50 is what 0.25p is worth on 1,000 shares; on a 100-share mini the same step is £0.25, as the table shows (ICE: Tesco mini and the Circular 25/123 contract list, checked 10 October 2026).

The table holds the contracts most UK readers meet, not every listing. Eurex, the Frankfurt derivatives exchange, also quotes options on a number of UK shares in pence: its BP contract (BPT) also covers 1,000 shares, can be exercised on any trading day and settles by delivery two exchange days later, so on Eurex as on ICE there is no 100-share BP option. Eurex also lists a £10-a-point FTSE 100 option (OTUK), but its statistics for 9 October 2026 recorded no trades and no open positions in any monthly expiry (Eurex: BPT and OTUK, checked 10 October 2026). The London Stock Exchange itself lists no options: its trading pages name shares, depositary receipts, exchange-traded products and bonds (checked 10 October 2026). The glossary has the detail.

Two traps sit inside the table. Ten minis carry the exposure of one standard contract but ten commissions: at an assumed £1.70 per mini contract (no published rate) that is £17.00, against £1.40 for one standard contract, which is why the cash-secured put page finds costs taking most of a mini's premium. And one FTSE 100 option controls £107,500 of index at the model level, about twenty times the BP contract, so the number of contracts an index hedge needs follows from the size of the portfolio being hedged; the FTSE 100 options page covers the ICE index contracts in full.

A contract's terms can also change after it is listed. A takeover, special dividend, rights issue or share split can leave a series delivering something other than 1,000 (or 100) ordinary shares; the chain then shows an adjusted series, which the assignment page explains how to read. US index options carry a timing trap of their own: standard monthly SPX options stop trading on the Thursday and settle on the Friday's opening prices (AM settlement), while SPXW weeklies settle on the Friday close (PM settlement), so a position that looks safe at Thursday's close can settle on a quite different number the next morning.

Reading an option chain: BP's October series

A chain lists every strike for one expiry, calls on one side and puts on the other, with the strike down the middle. The figure is a mock-up of BP's October 2026 chain on Monday 17 August, when the options had 60 days to run to Friday 16 October. The mid prices are the pricing model's values at a 26% volatility, rounded to BP's 0.25p tick; the bid and ask sit an illustrative 0.50p either side. A live chain differs: each strike carries its own implied volatility, spreads vary with the market maker, and far strikes may show no bid at all.

What each column tells a reader:

• Bid and ask. The best prices at which someone will buy from, and sell to, the reader. A buyer pays the ask, a writer receives the bid, and the mid is halfway between.
• Last. The price of the most recent trade. On a thinly traded ICE series it can be hours old, and it is not a price anyone is offering now.
• Volume and open interest. Contracts traded today, and contracts still open from all previous days. Open interest shows whether anyone else holds the series at all. The mock-up leaves both out, because a model has none to show.
• IV. The volatility that makes the pricing model return the market's price. The assumptions table gives every BP strike 26%; on a real chain the puts below the money usually carry more, which the implied volatility page calls skew.
• Delta. How far the option's price moves for a small move in the share, per share. Multiplied by the contract size it is roughly the number of shares one contract behaves like: 0.544 on the 530 call (0.54 on the chain) is about 544 BP shares.
• Strikes and expiries. ICE publishes minimum strike scales for UK stock options (at least seven strikes in months 1 to 12 and three beyond, at intervals from 2p to 800p by price band) but not which band each share is in (checked 9 October 2026), so the strikes here are illustrative and the live chain shows what exists. ICE UK stock options expire monthly on the third Friday, with no weekly expiries; the minis list the front three months and the next three quarterly months.

From a pence quote to pounds

On a standard ICE contract a pence quote becomes pounds by multiplying by 10: 1,000 shares, 100 pence to the pound. Buying one 530 call at the 24.50p ask costs £245.00, plus £1.40 commission, £246.40 in all. Writing one 530 put at the 20.25p bid brings in £202.50, less £1.40, £201.10. At the mid the same two trades would have been £240.00 and £207.50; the difference is the cost of crossing the spread, £5.00 a contract each way on this quote. The model values themselves, 23.88p and 20.86p, are £238.77 and £208.62 a contract.

The same arithmetic on a US chain, then into pounds

A US equity contract is 100 shares, quoted in dollars. Take a hypothetical US share at $100 (not a real company), 30 days to expiry, 30% volatility, the assumptions table's US rate of 3.625% and no dividend. Its at-the-money call is worth $357.58 a contract ($3.58 a share, rounded), which is £263.72 at an illustrative $1.356 per £1 on 17 August 2026 (the ECB reference-rate cross, 1.3559; a broker converts at its own rate).

For UK tax, a dollar option is two sterling figures, not one. The premium paid is converted at the exchange rate on the day it is paid and the proceeds at the rate on the day of sale, and a net dollar gain is never converted in one step (HMRC CG78310); the tax worked examples set out the two-date method, and hours, brokers and US withholding are on the US options page.

Intrinsic value, time value and moneyness

Every premium splits into two parts. Intrinsic value is what the option would be worth if it had to be exercised now: for a call, the amount by which the share price is above the strike; for a put, the amount by which it is below; never less than zero. Time value is the rest, the price of the chance that the option is worth more by expiry. An option with intrinsic value is in the money; one whose strike equals the share price is at the money; one with none is out of the money and is made entirely of time value.

Read along the chart at 530p:

• The 500 call is 30p in the money. Its 42.03p is 30p of intrinsic value, £300.00 a contract, plus 12.03p of time value, £120.25.
• The 530 call is at the money, so all 23.88p is time value, the most on the chain.
• The 560 call is 30p out of the money: 11.97p, £119.68 a contract, every penny of it time value.
• The 560 put is the 500 call's mirror, 30p in the money: 39.11p is 30p of intrinsic value and 9.11p of time value. It carries less time value than the 500 call, although both are 30p in the money, largely because of interest: a call holder keeps the strike money on deposit until exercise, while a put holder waits to receive it.

An American option can never be worth less than its intrinsic value, because the holder could exercise at once. That floor shows on the deep in-the-money puts. The 580 put's American value of 54.40p stands 0.93p above its European value of 53.47p: the worth of being able to exercise early and put the strike money to work. The Greeks page explains the gap and the assignment page shows when it leads to early exercise.

The split decides what a trade is really paid for. A writer of the 500 call receives £420.25 at the model value, but £300.00 of that is intrinsic value handed straight back if the call is exercised; only the time value pays for the risk taken. A buyer of the 560 call pays for nothing but time, all of which is gone if BP is below 560p at the close on 16 October. The covered call and cash-secured put pages build their strike menus on this split.

What moves a premium: 1% on the share, a volatility point, a day

With the strike and expiry fixed, three things move a premium: the share price, the volatility the market charges, and time. The table reprices BP's October 530 options for each change on its own, starting from 17 August. The Greeks page names these sensitivities (delta, vega and theta), gives their units and shows why a Greek's estimate and a full reprice differ; here the point is their size in pounds.

Three readings. The share price dominates: on the BP call a 1% move is worth more than three volatility points. Volatility lifts a put as much as a call, because a higher volatility makes large moves in both directions more likely; the two BP options gained almost exactly the same amount. And a single day's decay is small beside either, which is why decay wears down a bought option over a quiet fortnight rather than on any one day. A US option held in pounds has a fourth sensitivity, the exchange rate, which the Greeks page prices on a separate example.

Delta is a hedge ratio, not a forecast

A common shortcut reads a 0.30 delta as a 30% chance of the option paying off. Two things are wrong with it. Delta measures how the price moves; the model's probability of finishing in the money is a different quantity (N(d₂) against delta's N(d₁)) and, for a call priced at one volatility, a lower one. And finishing in the money is not the same as making money: a bought call only shows a profit above the strike plus the premium paid.

The $105 call is this chain's 0.30-delta option (0.31). The model gives it a 28.2% probability of expiring in the money and 22.4% of expiring above its $106.65 breakeven, where a buyer at $1.65 starts to make money. Neither is a forecast: both assume the share drifts at the interest rate and that 30% is the right volatility. The Greeks page sets delta against the probability of touching the strike as well (delta is not a probability).

Time decay speeds up at the money, not everywhere

Time value drains away as expiry approaches, but not at one rate. The chart follows two BP October calls through their last 30 days, from Wednesday 16 September, with BP held at 530p and volatility at 26%: the 530 call at the money and the 580 call 50p out of the money.

The at-the-money call loses 1.76% of its value on the first of those days and still holds 47.11% of it with seven days left, so almost half its value goes in the final week. The out-of-the-money call runs the other way: it loses 5.86% on the first day and has lost 98.30% by the time seven days are left. Far from the strike, time value is the price of a move that becomes less likely each day; the familiar line that decay accelerates into expiry holds only near the strike.

Theta, the one-day decay, is quoted per share in the option's own unit. The 530 call's theta with 30 days left is −0.29p a share: −£2.89 a contract a day on 1,000 shares, and a tenth of that on a 100-share mini. The $100 US call's is −$0.06 a share, −$6.19 a contract or −£4.57, on the closed-form rate of decay at that moment; a full one-day reprice gives −$6.24, as the US row in the table above shows. Tree-priced American options quote theta as that one-day reprice, so the two conventions can differ by pennies (Greek units).

Traders call an option a wasting asset because its time value runs down to nothing. The phrase has a narrower meaning in UK tax, and there it does not apply: TCGA 1992 s146 takes traded options out of the wasting-asset rules, so the whole premium counts as the cost when an option is sold or lapses, with no writing-down for the time that has passed (HMRC CG55416).

Exercise, sell or let it lapse

Only the holder decides whether to exercise. On an American contract (ICE UK stock options, US equity and ETF options) that can happen on any business day; on a European one (FTSE 100 index options, SPX) only at expiry. Before expiry, exercising an American option is rarely worth more than selling it, because exercise throws away the time value a sale would collect. The two usual exceptions are a call exercised the evening before an ex-dividend date, when the dividend about to be lost exceeds the time value left (and, for a holder without an options intermediary's SDRT relief, the 0.5% SDRT on the strike as well), and a put so deep in the money that the interest on the strike is worth more than its remaining time value. The assignment page prices both on BP: calls before the 12 November ex-date and deep in-the-money puts.

BP's October 500 call on 16 September: sell it or exercise it

Take the October 500 call, bought on 17 August at the 42.50p ask: £425.00 plus £1.40 commission, £426.40. Suppose BP has risen to 560p by Wednesday 16 September, an assumed price for the example, with 30 days left. The call's model value is then 62.54p: 60p of intrinsic value and 2.54p of time value. On the same illustrative 1.00p quote it bids 62.00p. There are three ways to turn the gain into something.

Selling beats exercising by £45.00: the £20.00 of time value the bid still pays (62.00p against 60p of intrinsic value) plus the £25.00 of SDRT that exercise triggers. Even for a holder who wants the shares, route 3 comes out £17.00 cheaper than route 2 before the share-dealing commission, because the time value collected outweighs the extra £3.00 of stamp tax on buying at 560p instead of 500p. Exercise wins only when the time value left is smaller than those frictions: close to expiry, deep in the money, or on the eve of a large dividend. No BP ex-date falls before 16 October, so this call has no dividend reason to be exercised early.

The routes also differ for tax. Selling realises the £192.20 gain in 2026/27. Exercising realises nothing: the call's cost becomes part of the shares' cost and the gain waits until the shares are sold, possibly in a later tax year. The tax worked examples take bought options through sale, lapse and exercise.

At expiry: automatic exercise and the 0.5% catch

An option still open at the close on expiry day is not left to chance. ICE Clear Europe automatically exercises options that meet the automatic-exercise settings in each contract's terms, and clearing members can lodge abandon instructions where the terms allow (ICE Clear Europe Clearing Procedures, section 5.5; the threshold for equity options is not stated there). In the US, OCC exercises any expiring equity option that is $0.01 or more in the money unless told otherwise, a process called exercise by exception. Brokers add their own policies: Saxo, for example, exercises all in-the-money long options and does not support abandoning them.

On a UK share the stamp tax can turn a small in-the-money finish into a loss. If BP closes at 501p on Friday 16 October, the 500 call is worth £10.00 of intrinsic value; exercised, it costs £25.00 of SDRT and £1.40 of commission, a net −£16.40 before anything the shares do next. Selling it before the 16:30 close, or an abandon instruction where the broker accepts one, avoids that. A US option has no such charge. The expiry-day timetable in UK time, including the 22:30 US exercise cut-off (21:30 in the weeks when US and UK clocks change on different dates), is on the assignment page.

For the writer: bought back, assigned or lapsed

A writer has three endings as well, and only the first is chosen. Buying the option back closes it at a known price. Assignment arrives when a holder exercises: ICE Clear Europe allocates equity-option exercises at random, one lot at a time, so any short position in the series can be picked, and the writer usually learns of it the next morning (how an exercise reaches a writer). A lapse leaves the writer with the whole premium. For tax the three are handled differently: the premium is a gain when the option is written (TCGA 1992 s144(1)); a buy-back adds its cost to that same computation (s148); and assignment folds the premium into the share sale or purchase instead (s144(2)). The tax worked examples take each through in pounds (written options).

When the shares or the cash arrive

UK share settlement is planned to shorten to one business day from 11 October 2027 (the regulations were still in draft on the FCA's page, updated 13 August 2026); we could not find a statement from ICE on how stock-option deliveries will follow (checked 28 September 2026).

What a trade costs before it makes anything

Four costs sit between a quoted premium and what a trade actually makes. The worked examples on this site use Interactive Brokers UK's published rates because they are published in full for ICE and US options; they are a reference point, not a recommendation, and other brokers' tariffs are compared on the broker comparison page.

The pound cost of a round trip hardly changes along the chain, so its weight falls as the premium rises: the cheap out-of-the-money call has to gain 18.3% just to pay for getting in and out, the in-the-money call 2.2%. That is why the worked examples on this site quote every breakeven before costs and again after them, as the methods page sets out line by line.

The appropriateness test and permission levels

Before an FCA-authorised broker lets a client trade options without advice, it has to find out whether the client understands them. The rule is COBS 10A: the firm must ask for information about the client's knowledge and experience of the type of product concerned (COBS 10A.2.1R). The execution-only route that lets a broker skip the question for listed shares and ordinary funds covers non-complex instruments only (COBS 10A.4.1R), and the definition of non-complex in COBS 10A.4.2R leaves out derivatives such as options, so an options account comes with the assessment.

The outcome is not the one many readers expect. If the broker concludes that options are not appropriate, it must warn the client (COBS 10A.3.1R); if the client gives too little information, it must warn that it cannot judge (COBS 10A.3.2R). If the client then asks to go ahead anyway, the FCA's guidance says it is for the firm to consider whether to do so (COBS 10A.3.3G). A failed test therefore triggers a warning, not a ban in the rules; whether a particular broker then declines is its own policy. A US broker opening an options account also gives the client the Options Clearing Corporation's disclosure document, Characteristics and Risks of Standardized Options, which sets out how exercise, assignment and settlement work on US-listed contracts.

After the assessment the broker grants a permission level, which decides the structures the account may hold. At Interactive Brokers, for example, a covered call needs Level 1, a bought option Level 2, a cash-secured put Level 3 and an uncovered call Level 4; the Level 1 page maps the four levels, and cash and margin accounts, onto this library's own three levels.

Listed options also sit outside the FCA's rules for restricted speculative investments (COBS 22.5), which cap leverage and give negative-balance protection on CFDs and spread bets. A writer of listed options can owe the broker more than the account holds, as the Level 3 page explains; the three-way comparison sets listed options beside spread bets and CFDs.

The test is not advice, and neither is this library. A personal recommendation on options can only come from a firm authorised to give investment advice: the FCA register shows whether a firm has that permission, and MoneyHelper's guide to choosing a financial adviser, to which the FCA's own consumer pages now point, explains the difference between independent and restricted advisers.

Four UK rules that US-written guides leave out

Most retail options education assumes a US investor at a US broker. Four UK rules change the arithmetic, and each has a page of its own in this library.

• No options in an ISA. HMRC's guidance for ISA managers excludes futures and share options from the investments a stocks and shares ISA can hold, so listed options sit in a general investment account, where gains are taxable. An ISA can hold a UCITS fund that writes options inside the fund (option-income funds). A SIPP rarely helps either: the big SIPP platforms offer no options, and the exceptions, a few specialist SIPPs, are explained in options in a SIPP.
• Capital gains tax, option by option. Writing an option is a disposal on the day it is written; a bought option that lapses is an allowable loss; exercise folds the option into the share purchase or sale (TCGA 1992 s144). In 2026/27 gains above the £3,000 annual exempt amount are taxed at 18% within the basic rate band and 24% above it (how many computations a trade creates).
• Stamp tax on delivery. When an option delivers UK shares, the buyer of the shares pays 0.5% SDRT on the strike: the call holder who exercises, or the put writer who is assigned (who pays SDRT).
• Two dates, two exchange rates. A dollar option's cost and proceeds are converted into pounds on their own dates, and US brokers need a W-8BEN form to apply the treaty rate to dividends (US options from the UK).

A written put's three endings, in pounds

A put written against cash is where many readers first meet the obligation side of an option, and its three possible endings show the whole idea at once. The cash-secured put page works one Tesco September 430 put, written on 17 August at 3.75p (£37.50) with £4,300 held to buy the shares if assigned. Its figures, restated:

The first two endings are what the structure is designed for; the third is what it costs. The £21.50 of SDRT is 0.5% of the £4,300 strike, and it falls on the writer because an assigned put writer is the one buying the shares. The maximum loss can be written down before the trade, but it is the price of the shares, not of the option.

Where the library goes from here

The library is written to be read in this order, and each page assumes the ones before it.

The UK reference pages can be read at any point: tax wrappers, tax worked examples, the SA108 return, the options CGT calculator, US options from the UK, the broker comparison, spread bets and CFDs and FTSE 100 options.

Self-check: ten questions on this page's numbers

Each question uses a figure from this page; the working is in the answer. Nothing is scored.

Pages that build on these basics

The strategy pages apply this page's arithmetic to their own positions: the long call (strike and expiry menus on the BP chain), the long put, the covered call (intrinsic and time value at each strike), the cash-secured put (the Tesco mini's costs), the collar, the bull call spread, the poor man's covered call (the Tesco mini again) and the iron condor (FTSE 100 at £10 a point).