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Buying and selling options

You can trade options on ASX Trade through an accredited broker.  The clearing house, ASX Clear acts as the seller to every buyer and the buyer to every seller, reducing risk and making it easier to take a position that reflects your view

Buying options

Options are traded through accredited brokers. You buy (or ‘take’) options from sellers (known as ‘writers’). Your broker does not deal directly with the writer. Instead, transactions are handled through the ASX Trade and ASX Clear platform.

Broker

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 trade options with your broker. You buy options from other investors or from market makers. Buying an option is called ‘opening a position’. You will need to tell your broker whether you want to take a call option or a put option. You are not obliged to exercise the call or put option. 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 buy at the best possible price.
  • A limit order instructs your broker to buy only at a specified price or better.

You will pay a premium for the option you purchase, the price of which is calculated by ASX.

Closing a position

Either you or the option writer 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 purchased a call option you would sell 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 receive when you sell is higher than the premium you paid when you opened your position – and vice versa.

Exercising options

As the option holder, the decision to exercise rests entirely with you. Depending on the style of option you hold, you can exercise at any time prior to expiry (American style) or only at expiry (European style). You should notify your broker if you wish to exercise an option.

Selling options

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 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.

Maintaining margins

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.

Market makers

The ASX ETO market making incentive scheme provides liquidity across the market, making it easier to buy and sell options over a variety of securities. 

Market information

ASX online courses

Both courses have 10 modules with each module taking 20-25 minutes to complete

Reach Markets Trading Courses

Complete suite of online courses from beginner to advanced options education plus trading courses on technical analysis and trading systems. (Free Sign-Up)

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Reach Markets Live Webcasts

Two monthly trading webinars designed for you to ask questions live while presenters walk through an introduction to options and advanced options trading. (Free Sign-Up)

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Options Trading Game

Challenge your knowledge of options and sharpen your trading skills.

Next game starts 19 Oct 2020.

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