About Exchange Traded Options (ETOs)
An option is a contract to buy or sell a financial product. For equity options, the underlying instrument is a share or exchange-traded fund (ETF). It establishes a specific price, called the strike price, at which the contract may be exercised, or acted on. And it has an expiration date. When an option expires, it no longer has value and no longer exists.
Options come in two varieties, calls and puts, and you can buy or sell either type. You make those choices - whether to buy or sell and whether to choose a call or a put - based on what you want to achieve as an options investor.
|Buy (Holder)||Sell (Writer)|
|Call Option||Right to Buy||Obligation to Sell|
|Put Option||Right to Sell||Obligation to Buy|
Benefits of trading ETOs
Exchange traded options (ETOs) can be used in a variety of ways to profit from a rise or fall in prices (PDF 339KB) including;
- Protect the value of individual shares or a portfolio
- Earn income
- Undertake to buy shares for less than their current price
- Lock in a buying price
- Get exposure to shares for limited risk
Explore the wide range of strategies available.
Components of ETOs
There are five key components of an option (PDF 877KB)
- The underlying security
- Contract size
- Exercise or strike price
- Expiry date
How options are valued?
The price (premium) of an option is not pre-set, but is determined by market forces. When the option taker and the option writer agree on a price for the option contract, the trade takes place.
Types of Exchange Traded Options
There are 3 different types of ETOs available on ASX.
In Australia, options are traded through three types of brokers:
- full service brokers
- discount brokers
- a combination of trade execution service and limited other services
Your choice of broker will depend on your previous trading experience, your level of confidence and time. Specific to the options market are accredited advisers that have met certain criteria to advise in options.
Like any investment, options have risks that you need to understand before investing. Specific risks include market risk. You should obtain independent advice from a professional adviser prior to making any final decision.