Westpac Online Investing 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.
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.
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.
Things you should know
This website is directed to and for the benefit of Australian residents who are located in Australia only. Share trading through this website is a service provided through Westpac Securities Limited ABN 39 087 924 221 AFSL 233723 by Australian Investment Exchange Ltd ABN 71 076 515 930 AFSL 241400 ("the Participant"), a market Participant of the Australian Securities Exchange Limited (ASX) and Chi-X Australia Pty Ltd, a clearing participant of ASX Clear Pty Limited and a settlement participant of ASX Settlement Pty Limited.
The information on this website has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should consider its appropriateness, having regard to your objectives, financial situation and needs and, if necessary, seek appropriate professional advice. If a Product Disclosure Statement is available in relation to a particular financial product, you should obtain and consider that Product Disclosure Statement before making any decisions about whether to acquire the financial product. The information contained on this website does not constitute the provision of advice or constitute or form part of any offer, solicitation or invitation to subscribe for or purchase any securities or other financial product nor shall it form part of it or form the basis of or be relied upon in connection with any contract or commitment whatsoever. Any securities or prices used in the examples on this website are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not a reliable indicator of future performance. This website may contain material provided directly by third parties. This information is given in good faith and has been derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group nor any of their related entities, employees or directors (together, “Westpac”), nor the Participant, accepts responsibility for the accuracy or completeness of, or endorses any such material. This website may also contain links to external websites. Westpac and the Participant do not accept responsibility for, or endorse the content of, such external websites. Except where contrary to law, Westpac and the Participant intend by this notice to exclude liability for material provided directly by third parties and the content of external websites.