Exchange Traded Options (ETOs), also known as Options, are a derivative security. This means their value is derived from an underlying asset, typically a share or an index. Options are a versatile and flexible tool and can be used to complement your existing strategy or to take advantage of new opportunities. Options can be used to gain exposure to the performance of an underlying share or index for a fraction of the cost so you can:
Benefit from rising and falling markets Options can generate wealth from rising and falling markets. A call option can profit from a rising market by locking in a buy price now and benefiting from the underlying security's capital growth over time. A put option can benefit from a falling market, by locking in a high sale price before values fall.
Smaller initial investment Options are a leveraged derivative instrument meaning you can gain exposure to an underlying asset and potentially make higher returns from a smaller initial outlay.
Protection A put option can be used to protect shares against a potential fall in share prices. Buying a put option gives you the right to sell your shares at a pre-determined price for the life of the option, regardless of how far the share price falls.
Leverage While leverage can multiply your gains they can also magnify your losses.
Additional margin requirements If you are writing ETOs and the market moves against you or if there is an increase in the required margin you may have to provide additional funds to meet your margin obligations. If you cannot do this, your broker may close out your position and you will be liable for any resulting losses.
Potential unlimited losses Writing or selling options can involve significantly more risk. If you write or sell options and the market moves against your position, you may lose more than the initial premium received. Where you have sold or written naked options, the losses are potentially unlimited.
Time decay Options have an expiry date which reduces the value of the option over time. The erosion of the option value accelerates as the option approaches the expiry date.
Market risk Market factors such as interest rates, market volatility and dividends can affect the value of an option. Options may fall in value or become worthless on or before expiry Changes in the price of the underlying may result in changes to the price of an option, but the change can sometimes be in a different direction or of a different magnitude to the change in the price of the underlying.
Options are highly leveraged and involve greater risks than trading shares. To activate Exchange Traded Options trading, you will need to register your trading account to trade options by acknowledging that you have read and understood the ASX educational booklet Understanding Options Trading, the ASX Options Strategies Booklet, the ETO Product Disclosure Statement, the Terms and Conditions and the Financial Services Guide.
To trade exchange traded options you will need to complete, sign and return the following documents:
For more information on exchange traded options please view our exchange traded options FAQs.
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