Options Trading
Options are a type of contract to buy or sell an underlying asset, such as shares or commodities. An options contract gives the owner the ability to buy or sell a specific product at a predetermined price, which can come in handy as prices fluctuate. With an options contract, you are not forced to buy or sell (unlike other derivatives, such as futures), so the most you risk losing is the cost of the contract itself.
An options contract that allows you to buy an asset is known as a call option while options that allow you to sell are called put options. One of the primary benefits to options trading is the ability to gain leverage over an investment. When purchasing an options contract, you only have to put forward a small percentage (known as the premium or initial margin) of the total value of the contract.
A simplified example of leverage can be obtained by comparing options to shares. Spending $10,000 on shares will give you exposure to $10,000 worth of shares - your profits/losses are dependent on the share prices for the amount of shares you own. With an options contract, you only need to deposit an initial margin (usually 2-5%). This means spending $10,000 could give you access to buy or sell $200,000 worth of shares, which greatly multiplies any profits/losses associated with the relative share prices.
Effectively, you can 'own' a large amount of shares (or numerous other products) for a much smaller outlay. Obviously, the risks of leverage work both ways, and options contracts are also prone to expiry. If you cannot settle your options contract before expiry, you will lose any initial margin with nothing to show for it.
Options are also used as a hedging tool to protect portfolios against price fluctuations, and on the ASX, you can find exchange traded options for a range of shares, market indices (both local and global), and a range of energy and agricultural-based commodities.
Options are a complex trading tool not normally recommended for beginners. You can read more about options trading here, and for professional advice, contact a qualified options broker or relevant financial advisor.
Options Trading Articles
To learn more about options trading please take a look at the following articles from stockmarket.com.au:
|
Options Trading - Uses and Benefits Options trading has many uses, benefits and associated risks... |
|
Sensible stock market operators always advise understanding the risks involved with trading and investing, and options contracts are no exception... |
|
Features of an Options Contract Once you understand how you can make money with options and can identify the risks involved, you may be interested at the details that make up your options contract... |