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1. Stock Option Definition
2. Style Your Table With A Traditional Touch
3. Here's why sophisticated investors use options to build their ASX portfolios - Stockhead
4. Saxo Markets Australia launches Exchange Traded Options (ETO) on ASX

Options also come with a range of different strike prices and expiration dates, giving them a great deal of flexibility. Go the ASX website at www.

This will take you through to a page that lists all the options available for that share, including both call and put options, and the different strike prices and expiration dates. To buy a call option, you want to be confident that the share price will increase above your breakeven price before the option expires. To give you a quick recap, a call option gives the buyer the right to buy shares in a company for a specified price called the exercise or strike price at any time until the option expires. They must hand over the shares at the strike price if the buyer exercises their option.

For taking on this obligation, the option writer receives a premium. But what about if you think a share price is about to go down? A put option gives the buyer the right to sell shares in a company for a specified price also called the exercise or strike price at any time until the option expires. As with a call option, the put option writer receives a premium for taking on this obligation.

There are two main reasons for buying a put option. First, you can buy a put to protect your existing shares from a potential fall — like a form of insurance. Second, you can buy a put option to speculate. The value of a put option increases as the share price falls.

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Please note that this example is shown for illustrative purposes and is not a recommendation. What happens if the share price takes a tumble?

Stock Option Definition

If you sell your shares — instead of falling, the share price might do the opposite. They could go up in value. Plus you want to collect any dividends Westpac pays you along the way. Buying a put option is one way of covering both angles. It allows you to participate in any upside, while also protecting you from any potential downside.

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Let me explain. As a put option buyer, remember you are buying the right to sell your shares at the strike price, at any time up until the option expires. If you exercise that right, the option seller must take delivery of the shares at that strike price. You just keep your shares and let the option expire without exercising it. You pay a premium to your insurer to protect you if something happens to your house. Like a fire or a wild storm. If nothing happens to your house, then you have no need to make a claim. Reasons to trade options Just as in every other investment choice, circumstances of the individual are important in determining the "right" options strategy.

Here are some of the reasons that investors and traders may want to trade options: Investors Earn income from your share portfolio - Investors can generate income from their portfolio by writing call options against their stock holdings. This is known as a covered call, or buy-write, and is one of the most commonly employed strategies by investors.

Protect share holdings — investors concerned about the near term outlook for a stock holding can protect against a share price fall by taking a put option in that stock. Options are available over more than 70 of the top shares listed on Australian exchanges.

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Protect portfolios — investors worried about the market outlook can offset potential portfolio losses by taking put option over the index. If the market falls, the put options increase in value as the portfolio declines. The effectiveness of this strategy depends on a number of factors, including the composition of the individual portfolio. If the share price is below the option strike price at expiry, the investor buys the stock at the strike price and keeps the premium for the original put option write. However in this scenario the investor still keeps the original premium. This is often referred to as a cash-covered put write.

Trade more opportunities — Option prices are sensitive to more factors than just the movement in the underlying share or index. Changes in volatility, interest rates and dividends can affect the value of options. This means traders can choose positions that reflect their views on more instruments and markets. Increase capital efficiency through leverage — traders use the leverage options provide.

This leverage comes at higher risk.

Style Your Table With A Traditional Touch

Tailor market exposures — there are many option structures and strategies available. A proper understanding of the risks involved opens up the world of collars, straddles, strangles, vertical and horizontal spreads, butterflies and condors, among many others. Traders can profit from a stock or index rising, falling, or standing still. Traders can construct positions that give more exact exposures to a potential event. Limit position risk — the taker of an option can only lose the initial premium.

Traders take advantage of this characteristic in many ways. Examples include investing a small percentage of the value of a basket of stocks in put options, reducing the overall risk of the traders position.

Here's why sophisticated investors use options to build their ASX portfolios - Stockhead

A trader who believes Bank A is cheap relative to Bank B could take call options in Bank A, and put options in Bank B, reducing the risk of the trade to the premium spent. Buy B or Sell S : The buyer of the option is the taker. The seller is the writer. The quantity of option contracts to trade: Most share options have a contract size of shares. The code of the option: The first three letters of the code are the underlying instrument. The last three characters are unique for each option. The strike price of an option: This is the price of the underlying share or index at which a future transaction could take place.

Also known as the exercise price. Call or put option: This outlines whether the taker has the option to buy call or sell put. See above for explanation. The style of the option expiry: There are two main types. A merican options can be exercised at any time up until the expiry of the option. E uropean options can only be exercised on the expiry date. American Call options over shares are sometimes exercised early for dividends. Index options are usually European.

The expiry date is the date on which the option expires: On or up until this date the taker of the option decides whether to exercise their rights under the option contract. But since retail brokers chose to hold their commissions steady it equated to an effective fold increase in fees. That has put many smaller traders off trading and has done little to promote widespread use of options. For all its initial good intentions, the move has had the opposite impact. The net result is that unlike the US and other parts of the world, options are not a low-cost trading tool and haven't been universally embraced.

While options can burn fingers in the wrong hands, they're a well-established, critical component of a serious financial centre. For many Australians they could be a useful tool to preserve the wealth that has been created in the sharemarket. The more that can be done to restore this part of the market to its former glory the better. Skip to navigation Skip to content Skip to footer Help using this website - Accessibility statement. Markets Derivatives Print article. Jonathan Shapiro Senior reporter.

Updated Jun 4, — 3. Save Log in or Subscribe to save article. Daniel Munoz Volume on single stock exchange-traded options is continuing to fall each month. The numbers aren't encouraging.

Saxo Markets Australia launches Exchange Traded Options (ETO) on ASX

More encouraging In the smaller equity-linked options market, volume is more encouraging and is indeed growing, with open contracts rising to an average of about , from , Jonathan Shapiro writes about banking and finance, specialising in hedge funds, corporate debt, private equity and investment banking. He is based in Sydney.

Connect with Jonathan on Twitter. Email Jonathan at jonathan. License article.