Trade Options

Shares and options are both traded on the ASX. Shares are evidenced by a stock certificate, while options are contracts.

An option is the right to buy or sell property at an agreed price; the right is purchased. It is also a contract between a buyer and a seller that gives the buyer of the option the right, but not the obligation, to buy/sell a specified asset. If not exercised by a stated date the money is forfeited.

Users

Options users are usually traders trying to profit, hedgers trying to protect themselves and investors trying to earn extra income. Options allow investors to develop strategies to suit bullish, bearish, or neutral market conditions. Traders who like hands-on and close monitoring of their investments find options attractive, as they can be used to leverage exposure to the share market, buy time to decide, protect shares from a fall and earn income.

Specifics

In the options contract, you will find the shares you have the right to buy/sell and the price at which you can trade, and also the time frame, or how long you have this right until it is forfeited.

Pricing

Option price is called premium. Since the buyer cannot lose more than the initial premium paid for the contract, the buyer risk is never more than the amount paid for the option. Profit potential, however, is theoretically unlimited. In return for the premium received from the buyer, the seller of an option assumes the risk of having to deliver (if a call option) or taking delivery (if a put option) of the shares of the stock.

Strategy

When trading options, take into account price, volatility or price fluctuations, and time. Monitor share price movements, volatility changes, and expiry month.

Many people recommend steering clear of options; usually the uninformed majority. Option trading does involve risk and jumping right in is as bad as knowing absolutely nothing about what they are. Ignorance can put you in a weak trading position when you can have profited with a bit of research.