The best way to diversify your stock portfolio and enjoy a potentially rewarding return when a foreign stock’s currency appreciates faster than your invested US dollar is to trade options on international stocks. This method for options trading comes with plenty of great opportunities. Still, you may face some substantial challenges along the way, too—trading options on international stocks can provide both diversification and risk exposure.
In this guide on international stock options trading, we’ll highlight the best reasons to start working these trades and investments into your portfolio (the opportunities and benefits). Still, our due diligence also outlines the potential drawbacks and challenges you should know about before diving in. Knowing where to start is always helpful, so we’ve also included a rough guide on the realistic steps to begin implementing an international stock options trading plan!
What Are International Stock Options?
International stock options could refer to stock options for foreign employees or investing in global stock markets. In this guide, we’re referring specifically to international stock market investments where US investors or traders can enjoy potential rewards for diversifying their portfolios in overseas markets. We’ll review the definition of international stock options and discuss the critical differences from domestic stocks. We’ll also address the various iterations of international options and which might be best suited for your investment goals!
Definition of International Stock Options
There are two kinds of international stock options:
- International stock options (or ISOs) are financial instruments that allow the holder to buy or sell a company’s stock. The value of international stock options is based on the underlying asset’s value (the company’s stock), and holders have the right to buy or sell at a specific price within a certain period of time.
- In this guide, we’re referring to the second kind of international stock option, which involves investing in international stocks rather than US domestic stocks. International stock options can help investors diversify their portfolios and make a significant profit if the currency of the foreign nation appreciates in relation to the US dollar.
International stocks are different from domestic stock options in a few ways. International stocks and investments aren’t as stable as domestic options because of economic or political instability overseas. Currency fluctuations can play a more significant role in international stocks—they’re a riskier endeavor, subject to significant gains or losses, due to the use of two currencies.
Across the globe, there are around 60 international stock exchanges where options trading is available, but these are two examples of the best:
- London Stock Exchange: As of August 2023, the total market value of all companies trading at the London Stock Exchange stood at $3.18 trillion. It’s the most valued stock exchange in Europe and one of the foremost international exchanges for options trading worldwide.
- Japan Exchange Group: Located in Tokyo, Japan, this international stock exchange has a market cap of 6.93 trillion (September 2024). It was created in 2012 by merging the Tokyo Stock Exchange Group and the Osaka Securities Exchange Company.
Other major international stock exchanges include the Shanghai Stock Exchange, Hong Kong Stock Exchange, Toronto Stock Exchange, Shenzhen Stock Exchange, and Deutsche Boerse. We’d be remiss if we didn’t mention the New York Stock Exchange or the Nasdaq, as they are both prominent international exchanges for options trading. However, these exchanges are better suited for people who live outside of the United States.
How Options on International Stocks Work
We’ll highlight the basic mechanics of buying or selling options on international stocks. There are several ways that traders and investors can get in on foreign investments. Options trading on international stocks helps investors diversify their portfolios and offers exposure to growth in markets located outside of the United States.
- American Depository Receipts: Foreign companies use American Depository Receipts (ADRs) to establish a trading presence in the United States and occasionally to raise capital. It also offers a convenient way for American investors or traders to buy foreign stocks. ADRs are listed, traded, and settled like domestic US company shares. They represent an underlying share in the foreign company, making them a convenient method for US traders or investors to add foreign stocks to their portfolios.
- Global Depository Receipts: Global Depository Receipts (GDRs) are traded, cleared, and settled the same way as domestic stocks in the United States, but they are shares of foreign companies issued by depository institutions in the United States and Europe. They can be denominated in euros, British pounds, or US dollars.
- Foreign Direct Investments: To attain FDIs, traders or investors can open an account with a local broker in the target country or an online broker app like Interactive Brokers, E*TRADE, etc. This international stock option is best suited to active, serious investors who are adept at researching, performing currency conversions, understanding tax implications, and being willing to pay additional costs.
- Global Mutual Funds: These mutual funds focus on international equities, offering traders or investors a more straightforward way to invest in international stock options that don’t come with much hassle. One can manage GMFs actively or passively using an overseas stock index. Compared to domestic stocks, global mutual funds can come with higher fees and operating costs, something that’s important to keep in mind before proceeding.
- Exchange-Traded Funds: These are the ETFs we reference quite a bit. They can focus on a specific country or offer exposure to multiple international markets. Either way, they are a convenient way to access foreign markets and are often simpler than assembling a portfolio of stocks on your own. ETFs specialize in several investment categories, such as investment styles, sections, market capitalization, or geographical area.
- Multinational Corporations: These are an excellent alternative for investors or traders who might not want to buy foreign stock options directly. Multinational corporations are offered by domestic companies that generate a substantial portion of their sales from places overseas. It’s a backdoor approach to international investments, though you’re not truly diversifying your portfolio. However, you get international exposure!
Some key differences between international stock options and domestic stock options, including factors like market structure, trading hours, and liquidity, should be noted.
- Market Structure: Domestic stocks are listed on the investor’s home country exchange—markets are confined to a single country’s economic conditions. International stocks represent companies listed on foreign stock exchanges. These allow for better portfolio diversification and expose investors to different regulatory landscapes and economic environments. Simply put, international stocks offer access to a broader range of markets.
- Trading Hours: Generally, the international stock exchange has around-the-clock hours compared to domestic exchanges, which are more limited. For example, the regular trading hours for stocks in the US are from 9:30 AM to 4:00 PM EST, which is more limited than an international exchange like the London Stock Exchange, which is open from 3:00 AM to 11:30 AM, or the Tokyo Stock Exchange which is open from 8 PM to 10:30 PM and then again from 11:30 PM to 2:00 AM.
- Liquidity: This term refers to how easily investors can buy or sell shares of a stock without significant price increases or decreases. Generally, domestic US stocks are more liquid than international equities, which means that they can be bought and sold much faster. In some foreign markets, securities trade less frequently, plus foreign markets aren’t as widely followed by analysts.
Opportunities of Trading Options on International Stocks
International stocks present investors and traders with unique opportunities that let them bring diversification to their portfolios, make some great money from currency appreciation, and hedge potential risk in the domestic markets. Consider these the top reasons to start trading options in international markets. In most cases, the rewards you could gain are well worth the risks you might take!
Diversification Benefits
Trading international stock options allows traders to diversify their portfolios across global markets. Traders can stabilize potential volatility by holding investments in the US and other foreign markets because not all markets move similarly. There’s the potential to hedge against domestic market downturns by accessing options in foreign markets. International stocks also offer additional opportunities as traders now have access to different economic regions and currencies across the globe.
Access to Emerging Markets
Traders and investors who hold investments in international markets can access opportunities for high returns in emerging markets through options. Specific locations across the globe are considered emerging markets, and it’s in these countries or regions that traders or investors can find some of the best opportunities for their stock portfolios.
China is a crucial example of an emerging market. It has the world’s second-largest economy behind the United States. Its stock market makes up one-quarter of the MSCI Emerging Markets Index, and its manufacturing sector is expanding significantly with the production of electric vehicles and its impressive exports of electronic equipment.
Currency Movements and Profits
Traders and investors can boost their total returns if they invest in securities or instruments denominated in an appreciating currency. On the flip side of the coin, securities rooted in depreciating currencies can take a toll on traders’ total returns, as profits take a nosedive under these circumstances. Keep an eye on currency fluctuations to find potential signals that it’s time to hold onto or sell a position to either hold the value of the security or avoid taking a dip in portfolio value.
Let’s look at an example to illustrate this point about currency movements and profit. The indicator of an appreciating currency is when it’s trading strong against the US dollar. Imagine a US investor buying shares in a French company when the euro was trading at 90 EUR to 1 USD. Fast-forward three years, the euro’s exchange rate has improved from 100 EUR to 1 USD.
So, how does the US investor benefit from this investment? They benefit from the potential increase in the stock’s price and get the perk of a higher dollar value when converting their earnings back to the dollar. The appreciation of the euro lets them earn extra money in addition to what they might have gained from a potential stock price increase.
Challenges of Trading Options on International Stocks
International options trading comes with challenges like any other kind of online trading or investments. Before diversifying your portfolio with international investments, it’s vital to know some of the challenges you might come up against in the experience.
Currency Risks
In dealing with international stocks, the value of the investment is worth more money when the foreign currency appreciates compared to the US dollar. This has the opposite effect when the foreign currency depreciates compared to the dollar. Not only do international stocks carry the risk of worthless investments, but there’s the chance a country your trading stocks within could put currency restrictions into place, keeping investors from cashing out if needed.
A key example of currency volatility and how it could impact profits and losses is the Japanese yen in 2008 and throughout the early 2010s. During the 2008 Financial Crisis, many central banks issued a policy of 0% interest rates, and Japan was no exception. Traders saw an opportunity to borrow the yen for nothing and invest that money in higher-yield overseas assets. Then, the credit crunch hit, and the yen began to appreciate once more. Investors panicked and started buying the currency to repay loans denominated by the yen.
Market Hours and Time Zone Differences
In international trading, some difficulties can arise due to different market hours—traders need to adjust for time zone disparities and keep track of multiple market open/close times. In addition to making time throughout the day to enter each market around the opening and closing bells, we’d highly recommend setting reminders on your device to alert you when each market is ready to open or close. Have your computer or device close by so you don’t miss out on prime trading times throughout the day or night.
Regulatory and Tax Considerations
Different countries have different regulations for trading options. Some nations don’t have capital gains tax, and some waive it for foreign traders or investors. When US residents buy stocks or bonds for companies in foreign nations, any capital gains and investment income could be subject to US income taxes and taxes from the company’s home country. It’s important to check local tax rates before investing in foreign markets.
While there are tax implications of trading options on foreign stocks, you should know a few things about catching some breaks on what you owe. For instance, you can claim a tax credit or deduction on your tax return for any qualified foreign taxes you might have paid, including taxes on dividends, interest, or income. The IRS also offers avenues for investors and traders to avoid double taxation.
How to Get Started with International Stock Options
What’s the best way to get started with international stock options trading and investment? Follow the steps below to begin your journey, using international stocks to diversify your portfolio and hedge against risk!
Choose the Right Broker
The first step is to find a legitimate online broker that offers its traders access to international markets. A few great examples include Interactive Brokers, E*TRADE, Webull, and Thinkorswim by Ameritrade. Each is overseen by the Securities and Exchange Commission (SEC), and it offers traders and investors a number of overseas investment opportunities.
Consider Hedging Strategies
If you’re new to international stock options, becoming familiar with hedging techniques and strategies traders use to manage currency and market risk is key. As you become more knowledgeable about these methods for insulating your portfolio against potential risks, you can maintain the momentum of diversification balanced with growing value.
Use options to hedge an international stock portfolio:
- Index Options: These track stock market indices and can be effectively wielded as a hedge to a large, diversified portfolio. Index options use the Nasdaq or S&P 500 to gauge the overall economy and get a wide cover of various market sectors.
- Put Options: To protect against significant price drops, put option holders can sell a stock at a predetermined price before its expiration date—higher than the current market price!
- Delta Hedging: This is another method for hedging an options position. It involves using options with opposite deltas to hedge your current position. It’s helpful for investors because they can maintain a delta-neutral position of zero.
- Delta-Gamma Hedging: Another helpful hedging technique for international options, the delta-gamma approach reduces the risk of underlying asset changes.
Leverage Tools for Tracking Global Markets
To successfully track global markets while trading international options, inventors and traders can use standalone technical analysis websites or trading platforms that offer technical analysis and other helpful tools to stay updated on international markets, news, and currency movements. International trading apps that let investors find the best in international options trading include:
- TradeStation
- Charles Schwab
- Tradier
- Lightspeed
- Interactive Brokers
- E*TRADE
- Ally Invest
- Fidelity Investments
Several standalone websites specialize in technical analysis when it comes to international stock options trading or investments:
- MetaStock
- TrendSpider
- MarketGear from iVest+
- Ticker Tocker
- Trade Ideas
- TC2000
- eSignal
- Slope of Hope
- NinjaTrader
- StockCharts
- Trading View
Investors or traders can generate watch lists, access real-time market data, and use market scanners to find prime opportunities. Tools like advanced charting backtesting and trade simulations can help investors determine which international stock options traders are worth the time, money, and effort to sell and maintain.
Examples of International Stocks with Options Potential
Some international stocks are better than others when trading successful options. Discover five of the best international companies for trading options and the reasons why that’s the case. We’ll highlight the best international options trading sectors so you’re familiar with the sectors where you should focus your efforts.
Case Studies
If you’re looking for successful options trades on international stocks, you’ll want to look for how liquid the stock is—the more liquid, the better! These stocks tend to have tighter bid/ask spreads, lower transaction costs, and are easier to buy and sell quickly than other positions or instruments. The prime indicator of a stock that’s incredibly active is the symbols that have the most transactions compared to others. You can check this information in the database by looking at the average daily call and put volume over the previous month.
Some examples of the best companies for successful trades on international stock options include the following:
- SPDR S&P 500 ETF (SPY): 7.7 million (average options volume)
- Nvidia (NVDA): 4.3 million (average options volume)
- Invesco QQQ Trust (QQQ): 3.8 million (average options volume)
- Tesla (TSLA): 1.6 million (average options volume)
- iShares Russell 2000 (IWM): 1.3 million (average options volume)
Top International Sectors for Options Trading
Some sectors are riper for trading international stock options than others. Some of the best sectors to focus on include:
- Healthcare
- Industrials
- Energy
- Finance
- Materials
- Real estate
- Utilities
- Information Technology
- Consumer Discretionary
- Communication Services
Use International Options Trading for a Robust Portfolio and Exposure to Overseas Markets
While it comes with unique challenges, international stock options are one of the best ways to grow the value of your online portfolio. Opportunities for trading options on international stocks include a well-diversified portfolio, access and exposure to emerging markets, and profits from currency movements. Challenges of trading options on international stocks include currency risks, balancing various market hours or time zone differences, and regulatory/tax considerations.
Remember to research thoroughly, stay informed on global markets, and develop a strategy tailored to international markets. Explore more educational resources on OptionsTrading.org.
