ASX Exchange Traded Options

Submitted by Marco on 2 January, 2006 - 12:03

ASX Exchange Traded Options are a financial derivative product that derives its value from a certian equity or security

Exchange traded options (ETOs) are versatile short dated financial products that allow investors to;

  • Protect the value of individual shares or a portfolio
  • Earn income
  • Undertake to buy shares for less than their current price
  • Lock in a buying price
  • Get exposure to shares for limited risk

Here are the basic terms and descriptions that any investor should know as they learn about equity/index options. Alternatively, you can start by listening to a short presentation and come back to this page when finished.

Equity options contracts convey on holders the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) shares of the underlying security at a specified price (the strike price) on or before a given date (expiration day). After this given date, the option ceases to exist. The seller of an option is, in turn, obligated to sell (in the case of a call) or buy (in the case of a put) the shares to (or from) the buyer of the option at the specified price upon the buyer's request.

  • Equity option contracts usually represent 1000 shares of the underlying stock.
  • Strike prices (or exercise prices) are the stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract. The strike price, a fixed specification of an option contract, should not be confused with the premium, the price at which the contract trades, which fluctuates daily.
  • Equity option strike prices are listed in increments of 10, 25 and 50 cents, depending on their price level.
  • Adjustments to an equity option contract's size and/or strike price may be made to account for stock splits or mergers.
  • Generally, at any given time a particular equity option can be bought with one of four expiration dates.
  • Equity option holders do not enjoy the rights due stockholders e.g., voting rights, regular cash or special dividends, etc. A call holder must exercise the option and take ownership of underlying shares to be eligible for these rights.
  • Buyers and sellers in the exchange markets, where all trading is conducted in the competitive manner of an auction market, set option prices.

Index options give you exposure to the securities comprising a sharemarket index.

They offer you similar flexibility to that provided by options over individual stocks, while allowing you to trade a view on the market as a whole, or on the market sector covered by the particular index.

Whereas the value of a share option varies according to movements in the value of the underlying shares, an index option varies according to movements in the underlying index.

The two types of equity options are Calls and Puts.
A call option gives its holder the right to buy 1000 shares of the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the option has the obligation to sell the shares.

The opposite of a call option is a put option, which gives its holder the right to sell 1000 shares of the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the put option has the obligation to buy the shares.

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