Revenge options trading is an emerging field of financial trading that has taken the world by storm. The trend began in the US but has started to appear across Europe. Revenge options are developed using complex algorithmic software, automated systems and other sophisticated technology. This system involves two investors who agree to enter into a contract where if one investor makes a bet on an event occurring, they set up the second investor so that they will profit if that event does not occur instead.
Traders can purchase revenge options contracts for many different types of events ranging from stock price movement all the way through to currency fluctuations etc. One trader might purchase the option if another trader increases their investment in a company over a certain threshold before the expiration date, or perhaps if a specific currency falls under a particular exchange rate before the expiration date.
Revenge options trading in the UK
The options trading system is still in its infancy. Many people advocate more stringent regulation of revenge options trading to ensure that investors do not take advantage of other investors by manipulating the system for their gain. It will be interesting to see how this develops over time. Still, so far, regulators across Europe have had mixed reactions to it, and some countries such as the UK have even blocked access for citizens altogether.
It is clear, though, that there is potential for huge growth in this market moving forward and early adopters stand to profit massively if they get it right. In other countries such as America, revenge options trading is quite popular. Revenge options trading entails buying an option on a company’s stock and then hoping that the price of that share falls to zero so you can get out at a considerable profit. Of course, the problem with this type of strategy is that it completely disregards any morals and could lead to financial ruin for many innocent people involved.
Avoiding it in the UK
In the UK, revenge options trading is when a party sells an option contract to the other at a price that they know will be difficult or impossible to purchase to make a profit. This is illegal due to its unfair nature and is punishable with severe sanctions.
In general, all sales of securities must be conducted according to the Principle of Reasonable Expectations. This states that all parties involved must have reasonable expectations for their investments. In financial terms, if someone purchases an investment, it may not be necessary that that investment shall pay off in any particular way. However, it is expected that if the investor wishes for the purchase to yield significant returns, then this sale must have been based on realistic grounds.
In most cases, revenge options trading does not happen in the UK because most people know how terrible it is. However, there are some cases where this has happened and has even been taken to court.
Risks associated with revenge options trading
Regarding the FCA’s Policy Statement on financial spread betting and Contracts For Difference, revenge options trading is classified as a form of ‘narrowly controlled activity’. This means that to engage in such activities in the UK lawfully, investors need to be in possession of an appropriate level of relevant permissions and authorisation from the FCA.
Other risks associated with engaging in revenge options trading may result in regulatory action, loss of principal or even criminal prosecution.
Knowing these things, it is far more beneficial for you as an investor to conduct your options trading with respect towards others’ expectations rather than trying to take them down. By following simple steps such as checking your judgement is reasonable and sticking to your word, you can avoid any conflicts arising from revenge options trading. New traders are advised to use reputable online broker Saxo Bank. For more information, get it here.