Share Options

Once you have figured out shares, there are various ways you can tweak and tailor your investments. One of the most common methods is to use options, which can do a number of things, such as reduce the risk, reduce the initial money you put in, limiting the trading range – depending on the type of option you hold. When trading shares, you usually want them to rise, however with options, you can bet many things, including if the share price rises, if the share price falls, if the share price remains flat or if the share price stays within a specific range.

There are two main types of Options

1. Equity Options (also known as Exchange Traded Options)which is 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 execute a trade on the shares with the buyer of the option at the specified price upon the buyer's request (ASX).
2. Index Options give you exposure to the securities comprising a share market 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 (ASX).

You can either buy put options or call options. Put options are the option to sell at a specific price, at or before the expiration date. The opposite of this is the call option which is an option to buy at a specific price, at or before the expiration date. On the other end of this are the “writers” of these options, these are the people who price these options and sell them to investors. This means, if you have the option to buy and sell, then they are obliged to buy and sell if you wish to transact. So if you hold a call option and decide to execute, then the writer is obliged to sell.

Why Options?

They can:

• Protect your shares from price volatility, in particular a fall in price
• Use your insight to earn income against shares you hold, or are looking to buy
• Increase your returns through leverage
• Diversify your portfolio

For more info on options, have a look at the ASX website.