A listed option is a contract between two parties that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a specific time frame. You can trade listed options on exchanges such as the Australian Securities Exchange (ASX).
There are two types of listed options: call options and put options. A call option gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset. The price at which the underlying asset can be bought or sold is the strike price.
The Australian Securities Exchange (ASX)
The ASX is the primary exchange for listed options in Australia. It offers a wide range of options on various underlying assets, including stocks, indices, and commodities.
The Sydney Futures Exchange (SFE)
The SFE is a futures exchange that offers trading in various derivative products, including options. Options that you trade on the SFE are cash-settled, so you will not have to take delivery of the underlying asset when you exercise your option.
OTC options are options that are not traded on an exchange. Instead, they are traded between two parties directly. OTC options can be riskier than exchange-traded options because it can be more challenging to find a counterparty to trade with you.
Why trade listed options?
Options provide leverage
Options, like CFDs, provide leverage, so they allow you to control a large amount of the underlying asset with relatively small capital. It can magnify your profits and losses, so it is vital to understand the risks before trading options.
You can use options to hedge
You can use options to hedge your portfolio against market risk. By buying put options, you can protect your portfolio from downside risk. Similarly, you can protect your portfolio from upside risk by buying call options.
You can use options to generate income
You can also use options to generate income. For example, if you sell a call option, you will receive the premium from the buyer. If the underlying asset price does not rise above the strike price, you will keep the premium, and the buyer will lose money.
You can use options to speculate
You can also use options to wager on the future price of an underlying asset. If you think the price of a stock will go up, you could buy a call option. If you think the price of a stock will go down, you could buy a put option.
Options are liquid
Options are liquid because they are traded on exchanges, meaning you can buy and sell options at any time of the trading day. Other liquid assets include ETFs, CFDs, and stocks.
What are the risks?
Options are a risky investment
Options are a risky investment because they are a derivative, meaning their value is derived from the value of another asset. The price of options can be volatile and may fluctuate rapidly in response to changes in the underlying asset.
Options are subject to time decay
Options are also subject to time decay, meaning that as the expiration date of an option approaches, the option will lose value even if the price of the underlying asset does not change.
You may be unable to sell your options before expiration
If you buy an option and the underlying asset’s price does not move in the way you expect, you may not be able to sell your options before they expire. It could result in you losing all of the money you invested in the options.
The underlying asset may not be available for delivery
If you exercise your option and try to buy or sell the underlying asset, you may not be able to find a counterparty who is willing to trade with you. It could result in you not being able to complete the transaction and losing money.
You may not be able to meet the margin requirements
If you trade options on margin, you may be required to deposit additional funds if the value of your account falls below a certain level. If you cannot meet the margin requirements, you may be forced to sell your options at a loss.
Look here for more options if you are interested in options trading in Australia.