Listed options are one of the most popular derivatives traded on the ASX. They allow investors to wager on the future direction of an underlying asset without having to take ownership of that asset.
You can use options for various strategies, such as hedging, speculation or income generation. And with a wide range of underlying assets to choose from – including shares, indices, currencies and commodities – there’s an options strategy to suit every investor.
What are listed options?
Listed options are a derivative, which means they derive their value from an underlying asset. In the case of listed options, that underlying asset is a security traded on the ASX – usually a share, index or commodity.
Options give investors the ability to speculate on the future direction of an underlying asset without having to take ownership of that asset. For example, if you believe the share price of Commonwealth Bank (CBA) will rise over the next few months, you could buy a call option on CBA shares. If the share price does indeed rise as you expect, your option will increase in value, and you could make a profit. Similarly, if you believed CBA’s share price would fall, you could buy a put option.
Here’s how to start your listed options trading journey
Decide what you want to trade
The first step in this expedition is to decide what underlying asset you want to trade. As options give you the ability to speculate on the future direction of an underlying asset, you must have a good understanding of that asset before you start trading.
Find a broker
Once you’ve decided on what to trade, the next step is to find a broker who can facilitate your trades. When looking for a broker, it’s essential to choose one that offers:
- A platform suitable for options trading
- Competitive commissions
- The ability to trade the underlying asset you’re interested in
You can trade listed options with Saxo.
Open an account and deposit funds
You need to open an account with your chosen broker and deposit funds. When you open an account, you’ll need to provide some personal information and documents to prove your identity and address. Once your account is opened and funded, you’ll be able to start trading.
Choose your options strategy
Now it’s time to choose your options strategy. Several different options strategies are available to traders, each with risks and rewards. Some of the more popular options strategies include:
Buying calls- Buying calls is a bullish strategy that profits if the underlying asset’s price rises.
Buying puts- Buying puts is a bearish strategy that profits if the underlying asset’s price falls.
Covered call writing- Covered call writing is a strategy that involves selling call options against shares you already own. It can help generate income, but it also limits your upside potential.
Put writing- Put writing is a strategy that involves selling put options. It can help to generate income, but it also exposes you to the risk of having to buy shares at an unfavourable price.
Place your trade
Once you’ve chosen your strategy, it’s time to place your trade. When placing a trade, you’ll need to specify the following:
- The underlying asset you’re trading
- The type of option (i.e. call or put)
- The expiration date of the option
- The strike price of the option
- The amount of money you’re willing to risk
Monitor your trade
After placing your trade, all that’s left to do is monitor it and see how it performs. If your prediction is correct and the underlying asset’s price moves in the desired direction, your option will increase in value, and you could make a profit. However, if the market moves against you, your option will decrease in value, and you could lose money.
Close your trade
Once you’ve reached your profit target or stop-loss level, it’s time to close your trade. To close a trade, you need to place an offsetting trade. For example, if you bought a call option, you would close your position by selling that same call option.
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