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 in certain circumstances in accordance with ASIC short selling relief. 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.