Options

Westpac Share Trading offers clients the ability to trade exchange traded options (ETOs), which are contracts over an underlying share or index listed on the Australian Securities Exchange (ASX).

Options are highly versatile and attract investors for a number of different reasons. Most commonly, investors use them to capitalise on share price movements without having to buy the physical shares, to protect the value of an existing portfolio or to generate additional income.

How options work

There are two main types of options: call options and put options.
 

There are two parties to each options contract: the taker (buyer) and the writer (seller).
 

The buyers and sellers of call and put options have different rights and obligations, including:
 

• Bought call option – the buyer has the right (but not the obligation) to buy a specific number of securities at an agreed price (the exercise price) on or before the date the option expires.
• Bought put option – the buyer has the right (but not the obligation) to sell a specific number of securities at an agreed price (the exercise price) on or before the date the option expires.
• Sold call option – the seller is obliged to sell the securities at the exercise price and quantity if the buyer exercises their right.
• Sold put option – the seller is obliged to buy the securities at the exercise price and quantity if the buyer exercises their right.
   

Each option contract is usually for 100 shares in the underlying security, and the price of the option is quoted on the market on a per share basis. The buyer of an option will pay a premium to the seller.

Option strategies

Profit from price rises and falls

Unlike buying and holding shares, options offer the flexibility to take a position that can profit from an upward or downward price movement in the underlying share price. If you buy a put option and the price of the share falls, you can profit by selling the option at a higher premium value on or before the date it expires. If you buy a call option and the price of the share rises, you can profit by selling the option at a higher premium value on or before the date it expires.

Make a smaller outlay for the same exposure

Buying a call option will potentially earn you larger returns from a smaller initial outlay than investing directly in the shares. You could potentially benefit from changes in the share price without paying the full price for the share.

Protect your portfolio

If you are concerned about a fall in the value of a shareholding, you could sell the shares immediately or buy a put option over those shares. If the share price falls below the exercise price of the put option, you have until the expiry date to exercise your right to sell your shares at the exercise price. On the other hand, if the share price remains stable or rises, you can let your option lapse and only lose the premium you paid.

Earn additional income

If you already own a parcel of shares and expect the share price to remain relatively flat, you can earn extra income by writing/selling a call option and receiving the premium from the taker/buyer of the option. In exchange, you carry the risk that should the share price rise, you may be obliged to sell your shares at the agreed price if the buyer exercises their option to buy.

Risks

Like any investment, options involve an element of risk and aren’t suitable for all investors or traders. Trading has the potential for either significant profit or significant loss. You should only trade options if you are confident that you understand them and the risks involved. So, before you decide to invest in options, consider your own financial position, investment objectives and level of experience.