Options Trading

Trade options on global stocks and ETFs online. read our Options Trading Guide Below then Proceed to Strategies

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LEARN ABOUT OPTIONS BELOW THEN PROCEED TO OPTIONS STRATEGIES

What is Options Trading01
Features of Options Trading02
Trade Both Long and Short03
Calculating Profits and/or Losses04
Options Trading Examples05
Key Benefits of Options06
Margin Obligations07
Risks of Options Trading08
Styles of Options Trading09
Tools & Resources10
How to Open an Account11
Supported Brokers12

Introduction to Options Trading

Navigate down the page using the buttons below to learn more about Exchange Traded Options.

2. Features of Options Trading

4. Calculate Profits and/or Losses

1. What is Options Trading?

Options traded over shares, indices, and ETFs are commonly known as Exchange Traded Option Contracts.

An Exchange Traded Option Contract that is a “Call Option” gives the buyer the right, but not the obligation, to buy an Underlying Instrument at the prescribed Exercise Price in return for payment of a Premium. An Exchange Traded Option Contract that is a “Put Option” gives the buyer the right, but not the obligation, to sell an Underlying Instrument at the prescribed Exercise Price in return for the payment of a Premium. The seller will be under an obligation to sell a share, index or ETF (in the case of a Call Option) or to buy a share, index or ETF (in the case of a Put Option) at the Exercise Price of the Exchange Traded Option Contract if the Exchange Traded Option Contract is validly exercised by the buyer. If an Exchange Traded Option Contract is exercised, it results in the establishment of a stock or ETF position, or cash-settled if it is a stock index.

WHY TRADE OPTIONS

Generate income from your stock holdings

Protect your portfolio with put options

Accurately control your risk when buying options

Lower your initial investment compared to equities

2. Key Points of Options Trading

There are two types of option styles; American style options (American Options) and European style options (European Options).

OPTIONS TRADING KEY POINTS:

1

EUROPEAN STYLE OPTIONS v AMERICAN STYLE OPTIONS

European Options can only be exercised on the Expiry Date and not before. American Options can be exercised at any time up until, and including, the Expiry Date. Exchange Traded Option Contracts traded on most Futures Exchanges are American Options. The seller of an Exchange Traded Option Contract that is an American Option must be prepared for that Exchange Traded Option Contract to be exercised at any time before the Expiry Date.You should clarify whether the Exchange Traded Option Contract you intend to trade is an American Option or a European Option prior to entering into the Transaction, as the operating rules of the StockOption Exchange may vary depending on the type of Exchange Traded Option Contract you are dealing with.

2

EXERCISING A CALL OPTION OR A PUT OPTION

The table below sets out the results from the buyer’s and seller’s viewpoint when the buyer exercises a Call Option or Put Option:

BUYER		SELLER
Bought Call Option	Bought Underlying Contract (at the Exercise Price of the Futures Option Contract)	Sold Call Option	Sold Underlying Contract (at the Exercise Price of the Futures Option Contract)
Bought Put Option	Sold Underlying Contract (at the Exercise Price of the Futures Option Contract)	Sold Put Option	Bought Underlying Contract (at the Exercise Price of the Futures Option Contract)

3

IN THE MONEY, AT THE MONEY AND OUT OF THE MONEY

An Exchange Traded Options Contract is always either “in the money”, “out of the money” or “at the money”.

“In the money”. An “in the money” Exchange Traded Options Contract is, in relation to a bought Call Option, if the Exercise Price is lower than the current market price of the Underlying Instrument and, in relation to a bought Put Option, if the Exercise Price is above the market price of the Underlying Instrument. An “in the money” option is, in relation to a sold Call Option, if the Exercise Price is higher than the current market price of the Underlying Instrument and, in relation to a sold Put Option, if the Exercise Price is below the market price of the Underlying Instrument.

“At the money”. An “at the money” option is, in relation to both Put Options and Call Options, if the Exercise Price is equal to the current market price of the Underlying Instrument.
For the most part, at expiry all “in the money” or “at the money” options are automatically exercised, however not all StockOption Exchanges automatically exercise “in the money” or “at the money” options at expiry. Accordingly, you should contact your Options Broker representative before the Expiry Date or the option may lapse worthless.

“Out of the money”. An “out of the money” option is, in relation to a bought Call Option is, if the Exercise Price is higher than the current market price of the Underlying Instrument and, in relation to a bought Put Option, if the Exercise Price is below the market price of the Underlying Instrument. An “out of the money” option is, in relation to a sold Call Option, if the Exercise Price is lower than the current market price of the Underlying Instrument and, in relation to a sold Put Option, if the Exercise Price is above the market price of the Underlying Instrument. If a Exchange Traded Option Contract is “out of the money” at a particular point in time, it does not mean it does not have value. That is, it may still have time value i.e. time until the Expiry Date in which the price of the Underlying Instrument may move in your favour.

4

HOW IS THE PREMIUM DETERMINED

The price to be paid or received in relation to an Exchange Traded Options Contract is the Premium. It is negotiated between the buyer and seller of the Exchange Traded Options Contract via the market and is payable by the buyer to the seller at the time the Exchange Traded Options Contract is entered into. The Premium is the compensation for the seller accepting the risk involved in selling the Exchange Traded Options Contract. The full value of the Premium is payable immediately upon executing the Exchange Traded Options Contract. This means that there must be sufficient Net Free Equity in your Trading Account before you can commence trading. Paying the Premium will allow you to keep or hold the Exchange Traded Options Contract until its Expiry Date (when it can either be exercised or it will lapse) or to sell it at any given point of time prior to its Expiry Date i.e. Close Out the open Exchange Traded Options Contract. The value of an Exchange Traded Options Contract will fluctuate during the life of the Exchange Traded Options Contract depending on a number of factors, including

the price of the Underlying Instrument;
the nominated Expiry Date and the time remaining to expiry;
the nominated Exercise Price;
the volatility of the Underlying Instrument; and interest rates, dividends and other distributions paid or payable in respect of the Underlying Instrument and general risks applicable to markets.

5

CLOSING OUT OF AN OPTION CONTRACT PRIOR TO EXPIRY

An ETO Contract can be Closed Out prior to the Expiry Date so as to realise any unrealized gains or losses:

For a bought Exchange Traded Options Contract: If you have bought an ETO Contract, you can Close Out your position by selling an equivalent ETO Contract through your Options Broker. Your Trading Account will then be credited with the value of the Premium for the sold ETO Contract at the time of Closing Out. You may make a gross profit on the Transaction if the value of the Premium for the sold ETO Contract is greater than the value of the Premium that you initially paid to buy the ETO Contract (subject to any fees, charges and other amounts payable). You will incur a loss on the Transaction if the value of the Premium for the sold ETO Contract is less than the value of the Premium that you initially paid to buy the ETO Contract.
For a sold Exchange Traded Option Contract: If you have sold an ETO Contract, you can Close Out the position by buying an equivalent ETO Contract through your Options Broker. Your Trading Account will be debited with the value of the Premium for the bought ETO Contract at the time of Closing Out. You may make a gross profit on the Transaction if the value of the Premium for the bought ETO Contract is less than the value of the Premium that you initially received to sell the ETO Contract (subject to any fees, charges and other amounts payable). You will incur a loss on the Transaction if the value of the Premium for the bought ETO Contract is greater than the value of the Premium that you initially received to sell the ETO Contract. Under certain conditions, it may become difficult or impossible for you to Close Out an ETO Contract. For example, this can happen when there is significant volatility in the level of the Underlying Instrument.

6

EXERCISE & SETTLEMENT

It is your responsibility to monitor your open positions and to Close Out any open position before the Expiry Date if you do not wish to be exercised.

Deliverable Exchange Traded Options Contract: If you have bought a Deliverable Exchange Traded Options Contract that is still open at the close of trading on the Expiry Date, you will be under an obligation to take delivery of the Underlying Instrument at the Exercise Price. If you have sold a Deliverable Exchange Traded Options Contract that is still open at the close of trading on the Expiry Date, you will be under an obligation to deliver the Underlying Instrument at the Exercise Price.

Cash-settled Futures Contract: If you have a cash-settled Exchange Traded Options Contract open at the close of trading on the Expiry Date, you will be under an obligation to pay (for a bought position) or have a right to receive (for a sold position) an amount of money depending on the price movement.

3. Take Both Long and Short Positions

With Options Trading you can take trades in both bullish or bearish direction when entering a transaction or trade.

The terminology of Long and Short is different in Options compared to other Derivative Instruments. A “Long Option” can be the purchase of either a Call Option, which will generally profit if the market goes up or the purchase of a Put Option, which will generally profit if the market goes down. Normally, with other instruments like stocks or CFDs a long position is a bullish trade and a short position is a bearish trade, not so with options. A “Short Option” is the sale of a Call Option, which is a neutral or bearish view or the sale of a Put Option, which is a neutral or bullish view.

You can take both “bullish” and “bearish” positions with options or even take profit from a neutral view of the market. If you take a bullish view on the underlying instrument (i.e. you “purchase” a call option or “sell” a put option), you may profit from a rise in the price of the Underlying Instrument, and you will make a loss if the price of the Underlying Instrument falls or doesn’t go up by much for a call or drops below your strike price less the premium received on the sale of a Put Option. Conversely, if you take a bearish position (i.e. you “sell” a Call Option or “purchase” a Put Option), you may profit from a fall in the price of the Underlying Instrument, and you will make a loss if the Underlying Instrument’s price rises if you buy a put option and a loss on a sold Call Option if the price rises above the strike price plus the premium received on the sold Call Option.

4. Calculating Profits and/or Losses:

If you Close Out an Exchange Traded Option Transaction (ETO Transaction) before the Expiry Date, the amount of any gross profit or loss made on an ETO Transaction (i.e. before fees, commissions and other costs) will be equal to the difference between the price the ETO Contract was opened and the price the ETO Contract was Closed Out, multiplied by the number of the ETO Contracts held. The indicative price for a ETO Contract at which you can enter into or Close Out is available on your Trading Platform.

These examples are included for illustrative purposes only, and are not indicative of actual exchange rates or values.

EXAMPLE 1:

Assume you purchase 10 AAPL Contract (i.e. you enter into a “long” ETO Contract) where the Underlying Instrument is the Commonwealth Bank share and the Exercise Price at which you enter into the ETO Contract is $80 and the Option price is $1.00. You later Closed Out the ETO Contract by “selling” (or exiting the “long” ETO Contract) at a higher Option price of $1.50. The resulting gross profit on the transaction would be $500 being sale price ($1.50) less buy price ($1.00) x 10 x 100 (the share amount per ETO Contract).

EXAMPLE 2:

Assume you purchase 10 XJO ETO Contract (i.e. you enter into a “long” ETO Contract) where the Underlying Instrument is the ASX200® Index and the Exercise Price at which you enter into the ETO Contract is 5450 and the Option price is $10. You later Closed Out the ETO Contract by “selling” (or exiting the “long” ETO Contract) at a lower Option price of $9. The resulting gross loss would be $100 being sale price ($9) less buy price ($10) x 10 x 10 (the share index amount per ETO Contract). The net loss is determined after adding commissions and any other charges.

5. Options Trading Examples

We have described how Options Trading works and the basic points of Options.

One of the key advantages Options have over other Derivative Instruments is the ability to either collect a premium by going short (selling) an option or limiting your risk to the premium you pay when going long (buying) an option.

For traders looking for income selling options can be a lucrative and steady form of trading for income, particularly if selling out of the money options where your winning percentage can be very high i.e. above 90%. Obviously, there is still a risk and that is premiums from selling out of the money options are very small and losses if the position goes against you, can exceed the premium received. That means you win:loss ratio is low for this type of trading.

For traders looking to take a speculative position on the direction of a stock or commodity buying options can give you the leverage to make high percentage returns with a limited risk aspect as the most you can lose on the trade is the premium received.

6. Key Benefits of Options Products

Options provide a number of benefits which must be weighed against the risks of using them. The benefits of Options are as follows:

HEDGING

You can use Options Contracts to hedge your exposure to the Underlying Instruments.

SPECULATING:

You may take a view on a particular Underlying Instrument and invest in Options according to this belief.

EXCHANGE TRADED

There is limited counterparty risk when trading Options Contracts as the Clearing House for the relevant Exchange stands behind the contract guaranteeing the performance of the Transaction

PROFIT POTENTIAL IN BOTH RISING AND FALLING MARKETS:

Since Options Markets are constantly moving, there are always trading opportunities, whether a particular currency, index, or precious metal is increasing or decreasing you can trade your view using Options. There is the potential for profit (and loss) in both rising and falling markets depending on the strategy you employ.

LEVERAGE

Options Transactions involve a high degree of leverage. These products enable you to outlay a relatively small amount (in the form of the Initial Margin) to secure an exposure to the movements in the value of the Underlying Instrument without having to pay the full price of actually acquiring the Underlying Instrument.

AUTOMATED TRADING

Another big advantage of Options Trading is that modern technology allows the automation of most tasks, from system development to copying other peoples trades, to order execution. With a little nouse, you can use powerful software programs to help you gain an edge in the market, and at the same time save huge amounts of time!

TRADE FROM ANYWHERE

Literally, trade from anywhere! One of the greatest advantages of trading options is the ability to trade from anywhere that has an internet connection. If you are one of the lucky few with the skills to make profitable trading decisions you can trade from home, work, a resort, the beach, a golf course, a resort, on the move… you get the idea.

7. Margin Obligations

Options products are subject to margin obligations i.e. you must have sufficient Net Free Equity in your Trading Account for security and margining purposes. You are responsible for meeting all margin obligations with your Options Broker.

TYPES OF MARGIN

Margin Requirements have two components; Initial Margin and Variation Margin.

INITIAL MARGIN

The buyer of an Exchange Traded Options Contract (“long”) is generally not subject to margin obligations as the buyer of an Exchange Traded Options Contract is required to pay the full value of the Premium at the time the Exchange Traded Options Contract is acquired. However, in some instances, an Initial Margin may be acceptable as opposed to paying the full premium when initiating a long position.

The seller of the Exchange Traded Options Contract (“short”) is entitled to receive a portion of the Premium based on the “mark to market” valuation of the Exchange Traded Options Contract (i.e. the seller of an Exchange Traded Options Contract does not receive the full value of the Premium upfront). A seller would also be required to pay an Initial Margin to open the position.

The Initial Margin required depends on the Options Exchange and/or Trading Platform on which the Exchange Traded Options Contract is traded. The Initial Margin will vary from time to time according to the volatility of the market. This means that an Initial Margin may change after a position has been opened, requiring a further payment (or refund, where applicable).

VARIATION MARGIN

As the value of your open positions will constantly change due to changing values of the Underlying Instrument, the Margin Requirement (being the minimum Net Free Equity required in your Trading Account) on the open positions will also constantly change. This is referred to as a Variation Margin. The amount of your Margin Requirements (being the Initial Margin and any adverse Variation Margin) at any one time will be displayed on the open positions report made available through your Options Brokers Trading Platform.

Any adverse price movements in the market must be covered by further payments from you (unless you already have sufficient Net Free Equity in your Trading Account). Your Options Broker will also credit the Variation Margin to your Trading Account when a position moves in your favour.

Your Options Broker will determine the Variation Margin for a Transaction by reference to changes in the value of the Underlying Instrument. In other words, each contract is effectively “marked to market” on at least a daily basis. “Marked to market” means that an open position is revalued generally in real time or at least on a daily basis to the current market value. The difference between the real time/current day’s valuation compared to the previous real time/ day’s valuation respectively is the amount which is debited (in the case of unrealised losses) or credited (in the case of unrealised profits) to your Trading Account. The valuations are calculated using the closing value (at the close of trading on each day) of the Underlying Instrument as determined by the relevant Pricing Source. Intraday “marked to market” revaluations will be based on the last available value of the Underlying Instrument as determined by your Options Broker in their sole discretion.

Margin Calls are made on a Net Trading Account basis i.e. should you have several open positions with respect to a particular Trading Platform, then Margin Calls are netted across the group of open positions. In other words, the realised and unrealised profits of one Transaction can be used or applied as Initial Margin or Variation Margin for another Transaction.

MARGIN CALLS

Margin Calls will be notified to you using ‘pop-up’ screens or screen alerts on the Trading Platform or via e-mail depending on your Options Brokers policies. You are required to log into the Trading Platform regularly when you have open positions to ensure you receive notification of any Margin Calls.

Your Options Broker is under no obligation to contact you in the event of any change to the Margin Requirements or any actual or potential shortfalls in your Trading Account.

FAILING TO MEET A MARGIN CALL

Your Options Broker generally applies risk limits (referred to as Default Liquidation Thresholds) to ensure that the percentage of your Trading Account balance which you are using at any one time to satisfy Margin Requirements (Margin Utilisation) does not exceed certain pre-defined levels. If your Margin Utilisation exceeds the Default Liquidation Threshold for your Trading Platform, a Margin Call will generally be applied to your Trading Account. If you do not meet a Margin Call immediately, your Options Broker may Close Out some or all of your open Transactions without notice to you.

The Default Liquidation Threshold is determined by your Options Broker. It is implemented for risk management purposes, and may be varied by your Options Broker at any time.

8. Risks of Trading in Options

PRODUCT RISKS

CHANGES IN THE PRICE, VALUE OR LEVEL OF THE UNDERLYING INSTRUMENT

Trading in the Exchange Traded Options Contracts involves a high degree of risk. It is important that you carefully consider whether trading Exchange Traded Options Contracts is appropriate for you in light of your investment objectives, financial situation, and needs.’

If there is an adverse change in the price of the Underlying Instrument, you may be required to immediately transfer additional funds to your Options Broker in order to maintain your position if you do not have sufficient Net Free Equity in your Trading Account. Those additional funds may be substantial. If you fail to provide those additional funds immediately, your Options Broker may Close Out some or all of your open positions. You will also be liable for any shortfall in your Trading Account balance following those closures.

OTHER VARIABLES THAT COULD LEAD TO LOSS

The following is a description of some of the other significant risks associated with trading the Exchange Traded Options Contracts.

1

INCORRECT DETAILS ARE ENTERED:

If you incorrectly place your intended order you are responsible for the result of the incorrectly placed order, including all costs to close out the position and any resulting profit or loss on the outcome.

2

FOREIGN EXCHANGE RISK:

In instances where you trade in an Exchange Traded Options Contract based on an Underlying Instrument priced in a currency other than your Trading Account Currency, your profit or loss will be determined by movements in the price of the Underlying Instrument and also by the impact of movements in the Exchange Rate. Adverse Exchange Rate movements could cause you to incur significant losses.

3

MARKET CONDITIONS:

Under certain market conditions it could become difficult or impossible to manage the risk of open positions by entering into opposite positions in another contract or to Close Out an existing position. Market conditions may also mean that the price of Options Contracts may not maintain their usual relationship with the value of the Underlying Instrument.

4

ORDER ACCEPTANCE RISK:

When you place an order (i.e. request to open or Close Out a position), your Options Broker will have an absolute discretion whether or not to accept and execute such request. The effect of their discretion is that an order you give may not be executed and you may suffer loss (whether it be actual loss or an opportunity loss) as a result. Your Options Broker will not be responsible for such loss.

5

Stop Losses:

Stop loss orders are often used to attempt to limit or minimise the amount which can be lost on an open Transaction. Stop loss orders may not always be filled and, in any event, may not limit your losses to the amounts specified in the order.

6

ONGOING LOSSES:

When you sell an Exchange Traded Options Contract, although you receive the Premium upfront, you are exposed to potential losses in the future in the event that the price of the Underlying Instrument moves against your position. The maximum amount of this potential loss is ongoing to the extent of the move and as such, selling unprotected options comes with a high risk.

7

THE CONSEQUENCES OF A FAILURE BY THE INVESTOR TO MAKE A PAYMENT OR DELIVERY:

If the level of the Underlying Instrument moves against your position, you will be required to have sufficient Net Free Equity your Trading Account to meet your Margin Requirement in order to maintain your position. The amount of funds required may be substantial. If you fail to pay your Options Broker immediately, your position may be Closed Out at a loss and you will be liable for any shortfall.

8

THE CONSEQUENCES OF ALTERING THE TERMS OF A DERIVATIVE OR TERMINATING A DERIVATIVE:

An Options Exchange may, in limited circumstances alter the terms of the Exchange Traded Options Contract. An example could include a corporate action in an underlying equity such as a share issue resulting in a change of terms to the Exchange Traded Options Contract.

9

ISSUER RISK – CREDIT WORTHINESS OF YOUR OPTIONS BROKER:

You will be exposed to the risk that your Options Broker becomes insolvent and are unable to meet their obligations. If your Options Broker becomes insolvent, then they may be unable to meet theri obligations to you in full or at all.

There are a number of risks that arise from the processes by which the derivatives are entered into or settled, including risks associated with using internet-based Trading Platforms. Such risks include, but are not limited to:

TECHNOLOGY RISKS

1

Risks related to the use of software and/or telecommunications systems such as software errors and bugs;

2

Delays in telecommunications systems;

3

Interrupted service;

4

Data supply errors; and

5

Faults or inaccuracies and security breaches.

A disruption to a Trading Platform could mean you are unable to trade in an Options Contract and you may suffer a financial loss or an opportunity loss as a result.

9. Styles of Options Trading

Today Options Traders have the ability to create income from Options Trading in a number of ways ranging from active to passive.

DISCRETIONARY TRADING

Discretionary Trading can be an active approach to trading Options. It involves making your own decision about the direction a market might take and placing orders via your online platform manually (in general) in an attempt to profit from short term price fluctuations. This is an active approach to trading that is very hands-on and involves monitoring the markets on an intraday, daily or weekly basis. The advantage of Discretionary Trading is that the human brain can assess the impact of variables outside the data made available to a computer program, such as qualitative analysis of fundamental data, external data sources like bank economic forecasts and last, but not least the superior capability of the human brain when it comes to pattern recognition. The disadvantage of discretionary trading is the impact of fear, greed and ego on the decision-making process, meaning even discretionary traders can benefit from a set of guidelines covering trade setups and risk management.

HYBRID APPROACH

Hybrid approaches to trading can also be utilised, and possibly with more success than each style of trading on its own. This can include making an assessment on a markets underlying conditions based upon fundamental research, valuations and forecasts from economists, Commitment of Trader (COT) reports, sentiment or other external information and then utilising a suitable type of trading system to enter and exit the market automatically according to your view. For example say you expect the market to go down you might choose a trading system that only trades the short side of the market until your view is realised, then you’d switch it off. The other advantage is if your view does not materialise utilising a trading system might result is smaller losses than simply being married to a particular view and holding onto losses in that market.

SYSTEMS TRADING

Also known as Algorithmic Trading, RoboTrading and Autotrading. Systems Trading involves the use of a computer program, which makes the buy and sell decisions based upon price action, technical indicators or quantitative analysis. The advantage, if you can find a reliable trading system is that you can automate the trading on your account and the computer will monitor the markets placing orders on your behalf, which means you can devote more time to research or other endeavours. The disadvantage of trading systems is that their success rate is not high, and they’re subject to technology risks so require oversight.

COPY TRADING

Perhaps the most passive form of Options Trading is known as Copy Trading or Mirror Trading. Copy Trading is the process of finding other traders with a track record and following their trades automatically on your account. Essentially you become your own portfolio manager and select a variety of traders to copy on your account. Copy Trading services allow you to view the track record of other traders and if you’d like to follow a trader simply click Copy on the desired strategy, enter your account number and the trades will be automatically copied into your account. You can start and stop copy trading at any time.