Selling (or ‘writing’) options follows a similar process to buying options. You place orders to write options through your broker, and transactions are handled through the ASX Trade and Clear platforms.
Option writers must fulfil different requirements to holders throughout the life of the option, particularly the obligation to pay margins.
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 write options with your broker. You sell options to other investors or to market makers. Writing an option is called ‘opening a position’.
You will need to tell your broker whether you want to write a call option or a put option. Writing a call option obliges you to sell the underlying securities if the option is exercised, whereas writing a put option obliges you to buy the underlying securities on exercise. 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 sell at the best possible price.
- A limit order instructs your broker to sell only at a specified price or better.
The buyer will pay you a premium for the option you write, the price of which is calculated by ASX.
You can sell options over securities that you do not own. This is known as a ‘naked’ transaction. However, this is a higher risk transaction than selling options in securities that you own (known as a ‘covered’ transaction). ‘Naked’ calls in particular can be risky; if the call is exercised you must be able to provide the securities. You should consult your financial adviser or broker before attempting ‘naked’ transactions.
As the option writer, you may also be liable for daily margin payments throughout the life of the option. ASX requires your broker to provide enough cash or collateral (such as shares or bank guarantees) to cover your (and others’ where applicable) obligations if the option is exercised. This is known as a margin. As option values increase and decrease, the margin required will also rise and fall. Brokers may also impose their own margin requirements over and above those required by ASX. Your broker, not ASX, will inform you of your margin requirements on a regular basis.
Your broker will also advise you if you need to increase your margin. You must usually do this within 24 hours, otherwise your broker may close out your positions, leaving you liable for any resulting losses.
Closing a position
You 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 written a call option you would buy 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 pay when you buy is lower than the premium you received when you opened your position – and vice versa.