Level 1 — Foundation

What Level 1 covers, and what it leaves out

Level 1 is the part of the course in which the worst case of every position can be written down before the order is placed, because anything written is backed in full: a call by the shares it could deliver, a put by the cash it could cost. Knowable is not the same as small. One written BP 500 put ties up £5,000.00 of cash to bring in £90.00.

The page assumes the mechanics on reading an option chain, intrinsic and time value and UK contract sizes, and what exercise and assignment do to an account. It then does four things no other page in the library does: it lays the five structures side by side on one chain, sets out which account and which broker permission each needs, follows a written put through assignment on ICE, and gives the tax result of every way each can end.

Level 1 leaves out every position whose worst case depends on a second option or on a broker's margin formula. Spreads, whose loss is fixed by the distance between two strikes, are Level 2. Written options with nothing behind them are Level 3.

Two options, five structures: the BP October chain

Model inputs. Monday 17 August 2026. BP at 530p, a model level (BP closed at 519.6p that day; price data: Yahoo Finance); BP is used as a model underlying, and this is not a view on BP. ICE standard options on 1,000 shares (BP has no 100-share mini), expiring Friday 16 October 2026, 60 days away. IV 26% at both strikes, Bank Rate 3.75%, and no ex-dividend date before expiry (BP's next is 12 November), so no dividend enters the prices. The call is valued with Black-Scholes-Merton and the American put on the binomial tree: model values 11.97p for the 560 call and 9.04p for the 500 put (as a European option the put would be worth 8.95p; the difference is the value of being able to exercise early), filled on the 0.25p tick at 12.00p (£120.00 a contract) and 9.00p (£90.00). Commission £1.40 a contract (Interactive Brokers UK, tiered rate, checked 26 September 2026), charged again when an option is sold, exercised or assigned but not on a lapse. The bracketed breakevens also take off half of an illustrative 1.00p quoted spread on each option (0.50p a share), as the methods page does; the money columns leave the spread out. The methods page also carries the full model sheet.

Size is the first thing a UK reader meets. Twenty-two large UK names, BP not among them, also have a 100-share ICE mini option, ticking in 0.25p and listed for the front three months and the next three quarters; a cash-secured put on the Tesco mini at a 450p strike would hold £450.00 of cash rather than £4,500.00 on the standard contract. The minis are listed on ICE; whether a broker offers them and quotes a two-way price has to be checked with the broker (UK contract sizes).

Shares bought to set up a covered call or a collar carry 0.5% stamp duty on the purchase, £26.50 on 1,000 BP at 530p; the table assumes they are already held. For the covered call and the collar the results are measured from 530p, so they are changes in the value of shares already held, not a taxable gain; the shares' own base cost decides that. Opening costs move each breakeven by 0.64p a share for each option traded: 0.14p of commission (£1.40 over 1,000 shares) and the 0.50p half-spread, so 1.28p on the two-option collar.

What one chain shows about all five

• The two income structures commit far more than they can make. The cash-secured put holds back £5,000.00 to make at most £88.60, 1.77% on the money held for 60 days (the £90.00 premium alone is 1.80%). The covered call keeps £5,300.00 of shares in the account for a £120.00 premium (2.26% of their value), and at most £418.60 if BP ends at 560p, or £417.20 once the shares are called away above it and the £1.40 assignment commission is paid.
• The bought options are the reverse. The call puts £121.40 at risk with no cap on the upside, and the put £91.40 for up to £4,907.20. In exchange, the whole premium goes whenever the option finishes out of the money, which on the model is the more likely outcome for both, as the next point shows.
• How often assignment arrives. On the model, the 500 put finishes in the money with a probability of 28.8% and the 560 call with 30.3% (risk-neutral, lognormal, IV 26%). Delta gives different numbers, −‍257 shares for the put and 340 for the call, because delta is not a probability.
• The collar here costs nothing to put on. The 560 call brings in 3.00p a share more than the 500 put costs, and in exchange the shares' result over the two months is held between £274.20 lost and £327.20 made.

The chart puts the table's two money columns on one scale. The two written structures stretch far to the left and barely to the right; the long call barely to the left and without end to the right. That asymmetry, not the premium, is the first thing each structure's own page works through.

The five payoffs at expiry

Each panel runs from 430p to 630p on Friday 16 October, on one shared pound scale; the dashed line is 530p and the dotted lines are the strikes. Green is profit and red is loss, per contract, before costs.

The same five on a US share, in dollars and pounds

Model inputs. A hypothetical US share at $20.00 (not a real company) on the same dates: 60 days to the US monthly expiry on Friday 16 October 2026, IV 30%, a dollar interest rate of 3.625% (the model sheet's figure) and no dividend assumed in the options' life. US equity options cover 100 shares, are American and tick in $0.05 below $3. Model values: the $19 put $0.4928 and the $21 call $0.6142, filled at $0.50 and $0.60: $50.00 (£36.88) and $60.00 (£44.25) a contract. Commission is $0.65 a contract with a $1.00 minimum an order, so $1.00 for a one-contract order. Pounds at an illustrative $1.3559 per £1 (ECB reference-rate cross, 17 August 2026); a broker's own rate will differ.

Three things change when the underlying is in dollars. The first is size: a US contract covers 100 shares, so the cash behind a written put on a $20 share is $1,900.00, against £5,000.00 on one BP contract. The second is the currency. If the account holds pounds and the platform converts them into dollars to stand behind the put, and back again afterwards, a conversion charge of 0.5% each way (an illustrative rate; platforms publish their own) costs $9.50 each time, $19.00 in all, which is 38% of the $50.00 premium. The third is the tax arithmetic: every leg is turned into pounds at the rate for its own date, never as one net dollar figure, as the tax page's two dates, two rates rule explains. There is no UK stamp tax on US shares delivered on exercise, US equity options settle one business day after exercise rather than two, and the trading day runs 14:30 to 21:00 UK time in most weeks (US hours and cut-offs in UK time; the W-8BEN form covers the withholding side).

What each ending does on a UK tax return

Every Level 1 structure can end in one of three ways: it lapses, it is closed by a trade, or it is exercised. The library's counting rule turns each ending into a number of computations and a date; this table applies it to the five. Nothing here is held in an ISA, because no ISA can hold an option (wrappers).

The written 500 put, three ways

• It lapses. A gain of £88.60, dated Monday 17 August 2026, in 2026/27: £15.95 of tax at 18% or £21.26 at 24%, on the assumption that the £3,000 annual exempt amount is used by other gains.
• It is bought back. On Friday 25 September, with BP at 500p and 21 days left, the put is worth 11.96p on the model and is bought back at 12.00p. The result, −‍£32.80 after both commissions, is still dated 17 August 2026, because under s148 the buy-back is a cost of the grant.
• It is assigned. BP closes at 480p on 16 October. There is no computation for the put. The writer acquires 1,000 BP on the exercise date with a base cost of £4,937.80 (493.78p a share): £5,000.00 for the shares, less the £90.00 premium, plus both commissions and the £25.00 stamp tax. At 480p the shares are worth £137.80 less than that cost, a paper loss that becomes a computation only when they are sold.

Written in March, still open on 5 April. The same put written in March 2027 gives a different answer for each ending. If it lapses, the gain belongs to 2026/27, the year it was written. If it is bought back in April or May, the buy-back still belongs to 2026/27 under s148; the online return for that year is not due until 31 January 2028, so this changes a return that is usually still unfiled, and only an early filer would need to amend one. If it is assigned in April, the premium moves into the cost of shares acquired in 2027/28, and any tax already charged on the grant is set off (s144(2)(b); CG12313, CG12317). The tax page works each of these on its 5 April timeline.

Two collar cautions that are not about tax. A collar over shares in an employer can conflict with the employer's share-dealing code, many of which forbid hedging those shares. And directors and other people discharging managerial responsibilities at a listed company may not deal, derivatives on its shares included, during the 30 calendar days before an interim or year-end report (UK MAR Article 19(11)).

Accounts and permissions: cash, margin and the broker's ladder

A UK broker offering listed options first runs an appropriateness assessment under the FCA's COBS 10A rules. It asks about knowledge and experience; a result that the product is not appropriate brings a warning, not a ban (what the assessment asks). Two further choices then decide what can be traded: the type of account, and the options permission the broker grants. Interactive Brokers (IBKR) is used below because it publishes both in detail and offers ICE and US options to UK clients through a UK entity; others differ, and the broker comparison sets them side by side.

All five Level 1 structures can therefore be held in a cash account at IBKR, as options bought outright, calls covered by shares and puts covered by cash. The margin row matters for the last line: a put written in a margin account is only cash-secured if the cash is kept there by choice, because the broker asks for much less. That gap is where a Level 1 put quietly becomes a Level 3 one.

The IBKR permission ladder, mapped to this course's levels

Two points follow. IBKR's list says "short put", not "cash-secured put", so a Level 1 put writer needs the broker's Level 3; that follows from the list rather than from a separate IBKR statement about cash-secured puts. And the iron butterfly and the jade lizard are not named on the list; each is built from pieces the list places at Level 3 (two short spreads; a short put and a short call spread), and the broker decides how it classifies the whole.

Portfolio margin is a separate, optional account type. At IBKR it needs options approval and at least USD 110,000 of net liquidation value to switch to, and an account that drops below USD 100,000 goes back to the standard (Reg T) calculation. It works out the requirement from the risk of the whole account instead of a formula for each position, giving credit for positions that offset each other. It does not decide what may be traded; the options level does that, and writing uncovered calls, straddles or strangles needs Level 4 on the ladder above, in an ordinary margin account.

US-registered broker-dealers work to one more rule. FINRA Rule 4210(b)(4) asks for equity of at least USD 2,000 in a margin account, a US requirement for firms that FINRA regulates. A UK entity's own minimum can differ, so the figure to check is the one the firm itself publishes for the account being opened.

When the written 500 put is assigned: the ICE sequence and the cash

The assignment page explains the machinery (from exercise to delivery); this is what it looks like from the writer's side for the one put on this page, if BP closes at 480p on expiry day.

Net of the £90.00 premium received in August, less its commission, the shares have cost £4,937.80, which is also their CGT base cost. An American put can also be assigned before expiry, most often when it is deep in the money after an ex-dividend date (early assignment of puts). On the US share the same step settles the next business day, costs the writer of the $19 put $1,900.00 and carries no UK stamp tax.

The covered call's version runs the same way in reverse. If the 560 call is assigned, 1,000 BP leave the account at 560p two business days after exercise, the writer receives £5,600.00 and pays no stamp tax, and the disposal proceeds for CGT are £5,717.20 once the £120.00 premium is added and both commissions come off. BP bought again within 30 days is matched with that disposal first (the 30-day rule).

Pages that build on Level 1

Each of these works one structure or one rule from this page in full, with its own numbers:

Self-check: ten questions before Level 2

Not scored, and not a requirement. Readers who can answer these from the numbers on this page will find Level 2 easier going; each answer shows the working.

How these numbers are calculated