Options are traded through accredited brokers. You buy (or ‘take’) options from sellers (known as ‘writers’). Your broker does not deal directly with the writer. Instead, transactions are handled through the ASX Trade and ASX Clear platforms.
Choosing a broker
Options are traded through ASX-accredited brokers. You will need to sign a Client Agreement form before you start trading. If your current broker is not active in options, or accredited to advise on options, it is wise to seek out a specialist broker in this area.
Opening a position
You place an order to take options with your broker. You buy options from other investors or from market makers. Buying an option is called ‘opening a position’. You will need to tell your broker whether you want to take a call option or a put option. You are not obliged to exercise the call or put option. You will also need to tell your broker whether you wish to make a market order or a limit order.
- A market order instructs your broker to buy at the best possible price.
- A limit order instructs your broker to buy only at a specified price or better.
You will pay a premium for the option you purchase, the price of which is calculated by ASX.
Closing a position
Either you or the option writer can close your positions at any time. This does not affect the other party, as your rights and obligations are simply transferred to another investor or market maker.
To close your position, you typically take an offsetting position. For example, if you had purchased a call option you would sell an equivalent call option (with the same exercise price and expiry date) to close out the position. You can make a profit on closing out if the premium you receive when you sell is higher than the premium you paid when you opened your position – and vice versa.
As the option holder, the decision to exercise rests entirely with you. Depending on the style of option you hold, you can exercise at any time prior to expiry (American style) or only at expiry (European style). You should notify your broker if you wish to exercise an option.