New to options
When you're considering using any investment product, education is vital. CommSec and the Australia Securities Exchange (ASX) offer a great range of educational tools on Options trading, methodology and strategies.
How Options Work
There are two types of Options – Call Options and Put Options. These two options can be bought or sold. They can also be used in combinations to create a variety of strategies suited to your risk tolerance.
With options positions it's important to look at the implications of holding options positions from both the stand point of the BUYER (or taker) of the option, and the SELLER (or writer) of the option.
Call Options:
With options positions it's important to look at the implications of holding options positions from both the stand point of the BUYER (or taker) of the option, and the SELLER (or writer) of the option.
Bought Call Options:
A Call option provides the BUYER with the right (but not the obligation) to buy a specific number of securities, for a specific price, for a set period of time. There is no obligation placed on the buyer of the Call option; you have the right to decide to buy or not.
Benefits:
- Time to decide – whilst the price to buy stock is set.
- Risk limited to cost of the option premium.
Sold Call Options:
A seller or writer of an option is obligated to deliver stock if required by the buyer at the agreed price and quantity up until expiry of the op
Benefits:
- Receive premium income of the option.
- Leverage – gain exposure greater than the upfront margin required.
- Can lodge existing stock as security.
Risks:
- Possibly unlimited risk (where you don't own the underlying shares & the price rises dramatially).
- Daily margin requirements - these can be substantial.
Put Options:
Bought Put Options:
A Put option provides the BUYER with the right to Sell a specific number of securities, for a specific price, for a set period of time. No obligation is placed on the holder of the put option; they have the right to any upside, while having the protection in place.
Benefits:
- Insurance against the downside (if you are holding the underlying shares), with a guaranteed exit/sale price for your shares.
- Risk limited to the cost of the option premium
Sold Put Options:
A seller of an option is obligated to buy the stock if required by the buyer at the agreed price and quantity up until expiry of the option.
Benefits:
- Receive the premium income of the option.
- Leverage – gain exposure greater than the margin lodged as collateral.
- Can lodge stock as security.
Risks:
- Possibly large losses on positions if the underlying company falls substantially (including to $0).
- Daily margin requirements – these can be substantial.
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A Product Disclosure Statement for Exchange Traded Options, ASX CFD & OTC CFD issued by Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 is available from www.commsec.com.au and should be considered before making any decision about the product. There can be high levels of risk associated with trading in options, only investors familiar with the risks of options trading should consider these products.