• Exchange Traded Options - ETOs

Australia

The ASX offer ETOs over equities, indices, and futures.

Equity options have been around since 1976 and are available over the biggest stocks. The list varies over time as stocks are added and removed in response to a range of factors. As an example if a company is no longer listed due it being taken over or going into receivership then options trading will cease.

Equity options contracts provide buyers the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) shares of the underlying security at a specified price (the strike price) on or before a given date (expiry day). After the expiry date, the option ceases to exist.

The seller of an option is, in turn, obligated to sell (in the case of a call) or buy (in the case of a put) the shares to (or from) the buyer of the option at the specified price upon the buyer's request.

Equity option contracts usually represent 1,000 shares of the underlying stock.

ETOs over indices and futures are similar to stock options however important details like settlement, time of expiry differ. It’s important to not overlook these details should you start trading options over different underlying assets.

Calls and Puts

The two types of equity options are Calls and Puts. A call option gives its holder the right to buy 1,000 shares of the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the option has the obligation to sell the shares.

The opposite of a call option is a put option, which gives its holder the right to sell 1,000 shares of the underlying security at the strike price, anytime prior to the options expiry date. The writer (or seller) of the option has the obligation to buy the shares.

Strategy

The range of strategies that can be built using options are many and varied.

They can be used to:

• Protect stock holdings from a decline in market price.


• Increase income against current stock holdings.


• Prepare to buy stock at a lower price.


• Position yourself for a big market move - even when you don't know which way prices will move.


• Benefit from a stock’s rise or fall without incurring the cost of buying the stock outright.

Also worth noting about options is the fact they provide asymmetrical payoffs. That is profits and losses are not equal or symmetrical.

In the case of buying or going long an option, loss is limited with profits potentially unlimited. The compares with buying or selling stock where profits and losses are for practical purposes equal in amount. We could just as easily make $10 as lose $10. Options on the other hand allow you to limit your exposure to a known amount, guaranteed.