Options trading

Options trading is a form of derivative trading that allows you to trade on the Australian securities market. There are a number of options strategies which traders can use to help improve the performance of their portfolio.

What are options?

Options are contracts that give the buyer the right, but not the obligation, to buy or sell underlying securities at a predetermined price on or before a specific date. Like warrants , options are listed on regulated exchanges such as the Australian Securities Exchange (ASX), and are specifically referred to as Exchange Traded Options (ETOs).

Options can be traded on several kinds of underlying securities, the most popular being equities (stocks), indices and Exchange Traded Funds (ETFs). There are also many options strategies which can help traders limit their risks and take advantage of market opportunities.

What is options trading?

Options allow traders to ‘lock in’ a future buy or sell price for underlying assets. The set price you agree on won’t change and it’s this fixed element that smart investors and brokers rely on.

Options come in two forms: calls and puts. A call option gives the buyer of the contract the right to buy at a specific price (also known as the ‘strike price’). Alternatively, a put option is where the buyer acquires the right to sell at a specific price. Options can be traded on the CMC Markets Stockbroking platforms. To view more information or activate options on your account, click here.

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Why trade options?

There are several advantages to options trading. Exchange Traded Options (ETOs) allow you to diversify and grow your investment portfolios, and can also protect you from market fluctuations.

Earn income from your share portfolio – You can write options against shares you already own to earn additional income. While this will generate income upfront from the premium, you’ll be obliged to deliver the shares at the agreed price if the option is exercised.
Profit from rising and falling markets – You can profit from a call option in a rising market by locking in a buy price and benefiting from the underlying security’s capital growth over time. Or you can benefit from a put option in a falling market by locking in a high sale price before the security’s value falls.
Hedge against share price falls – A put option gives you the right to sell your shares at a pre-set price for the life of the option in return for payment of a premium. The pre-set price applies, no matter how low the share price may drop. Put options can be used to offset potential falls in share prices, and therefore the drop in your portfolio value.
Leverage your portfolio - You can leverage your share trading to increase your investment opportunities through buying options, which only involve payment of a premium and not the full value of the shares.

Options strategies

The many trading strategies that surround options can make them appear complex, but all options strategies are actually based on the same principle. Some strategies may only appear more complex because they are built from multiple options. However, you should make sure you are aware of how option prices are affected by volatility and other factors, as well as by movements in the underlying share price.

Familiarising yourself with a variety of strategies will help with your overall understanding of options trading, as well as helping you take advantage of opportunities in the markets. Some strategy examples include iron condor, covered call, protective put and protective collar.