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Profit potential from any market direction Exchange Traded Options Options are a versatile and flexible tool. How it works. Bought Call Options give the BUYER the right but not the obligation to buy a specific number of securities, for a specific price, on or before a set date. Bought Put Options give the BUYER the right but not the obligation to sell a specific number of securities, for a specific price, on or before a set date. Generate income If you're expecting the price of a share you own to remain flat or fall slightly, you can earn extra income by writing Call Options and receiving the premium upfront.

Protect your portfolio Protect your shares against a fall by buying a Put Option that locks in the shares' sale price for the life of the option. Trade your perspective Options are a flexible tool that you can use with a range of strategies in all market conditions rising, falling, flat. Small initial outlay With Options, you can potentially make higher returns from a smaller initial outlay than investing directly.

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Diversify your portfolio With a smaller initial outlay, you can have a more diversified portfolio than if you bought shares directly. Time to decide A Call Option gives you time to decide on buying shares.

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Market risk Options may fall in value or become worthless. Time decay Options have an expiry date and therefore a limited life. Leverage Leverage can lead to large losses as well as large gains. Option writers may face unlimited losses Selling Options involves significant risk. Liquidity risk Your ability to trade out of a strategy may depend on a quote from a Market Maker.

Calls for additional margin If the market moves against you or margins increase you may have to provide additional funds at short notice. Rates and fees. Brokerage Rates. Trade Execution.

Internet also charged upon exercise or assignment of the option. Phone also charged upon exercise or assignment of the option. ETO Contract Fees. ETO Contract fees per contract. Amount per contract 1. Other fees and charges. Option fail fee per day. Late settlement fee. Equity fail fee per day assignment and exercise. Rebooking fee. Get started. Already a CommSec customer?

Not a CommSec customer? Trading strategies. Protective Puts. Hedge your stocks against a fall in value, providing protection in times of market uncertainty. Covered Calls. Generate additional income in a market that is flat to moderately bullish. Short Put. The futures market performed its function of price discovery more rapidly than the stock market did. Futures contracts have even been enlisted in the fight against air pollution and the effort to curb runaway health insurance costs.

When the Environmental Protection Agency decided to allow a market for sulfur dioxide emission allowances under the amendments to the Clean Air Act, the Chicago Board of Trade developed a futures contract for trading what might be called air pollution futures. The reason?

If futures markets provide price discovery and liquidity to the market in emission allowances, companies can decide on the basis of straightforward economics whether it makes sense to reduce their own emissions of sulfur dioxide and sell their emission allowance to others, or instead to sustain their current emission levels and purchase emission allowances from others.

Without a futures market it would be difficult to know whether a price offered or demanded for emissions allowances is high or low. But hedgers and speculators bidding in an open futures market will cause quick discovery of the true price, the equilibrium point at which buyers and sellers are both equally willing to transact. Similar reasoning has led to some decidedly unconventional applications of futures technology.

The Iowa Electronic Market introduced political futures in , and this market has generally beaten the pollsters at predicting not only the winner of the White House but also the winning margin.

How Exchange Traded Options might protect your SMSF portfolio

This makes sense because people are much more careful with information when they are betting money on it than when they are talking to a pollster. Economist Richard Roll showed that the orange juice futures market is a slightly better predictor of Florida temperatures than the National Weather Service. The idea was to let people speculate on events in the Middle East and win real money if they made the right bet. Congressional outrage nipped that plan in the bud, but the underlying logic was sound. If futures markets are an efficient mechanism for assimilating information and assessing probabilities, why not use them for statecraft and military applications?

Options are among the most important inventions of contemporary finance. Whereas a futures contract commits one party to deliver, and another to pay for, a particular good at a particular future date, an option contract gives the holder the right, but not the obligation, to buy or sell. Options are attractive to hedgers because they protect against loss in value but do not require the hedger to sacrifice potential gains.

Most exchanges that trade futures also trade options on futures.

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There are other types of options as well. The Philadelphia Stock Exchange has a thriving business in currency options. The options market owes a good deal of its success to the development of the Black-Scholes option pricing model. Developed by economists Fischer Black, Robert C.

Merton , and Myron Scholes , it was first published in The model considers factors including the current price of the stock or currency, its volatility, the price at which the option allows the buyer to buy the stock or currency in the future, interest rates, and time to calculate what the option is worth. In , Merton and Scholes received the Nobel Prize for this breakthrough. Fischer Black had died, and the prize cannot be awarded posthumously, but the Nobel citation said,. Black, Merton and Scholes thus laid the foundation for the rapid growth of markets for derivatives in the last ten years.

Their method has more general applicability, however, and has created new areas of research—inside as well as outside of financial economics. A similar method may be used to value insurance contracts and guarantees, or the flexibility of physical investment projects. Not all options trade on exchanges.

The Options Landscape for Hedge Funds

There is also a large, so-called over-the-counter OTC market in options. Participants in the OTC market include banks, investment banks, insurance companies, large corporations , and other parties. OTC options differ from exchange-traded options. Whereas exchange-traded options are standardized contracts, OTC options are usually tailored to a particular risk. If a corporation wants to hedge a stream of foreign currency revenue for five years, but exchange-traded options are available only out to six months, the corporation can use the OTC market.

An insurance company or bank can design and price a five-year option on the currency in question, giving the company the right to buy or sell at a particular price during the five-year period. Although users of the OTC options market do not access the futures exchange directly, the prices discovered on the futures exchanges are important data for determining the prices of OTC options. The liquidity and price discovery elements of futures help to keep the OTC market from getting far out of line with the futures market.

When futures markets do not exist or cannot be used, hedgers pay steeply for the protection they seek. Futures Markets In the late s and early s, radical changes in the international currency system and in the way the Federal Reserve managed the U. Fischer Black had died, and the prize cannot be awarded posthumously, but the Nobel citation said, Black, Merton and Scholes thus laid the foundation for the rapid growth of markets for derivatives in the last ten years. About the Author Gregory J. Millman is a journalist and author. Further Reading Hull, John C.

Options, Futures and Other Derivatives. New York: Prentice Hall, Miller, Merton H. Financial Innovations and Market Volatility. Cambridge, Mass. Millman, Gregory J. New York: Times Books, You can use options to tailor a range of strategies, from the simple to the more complex, to match your investment goals and your appetite for risk.

Our upgraded trading platform has a 2-tier model for Options trading. At Tier 1, you can write covered Calls and Puts. At Tier 2, more complex Options trading strategies are available. There can be high levels of risk associated with trading in Options, so you will need to have a clear understanding of them before proceeding. Please contact us if you wish to obtain a hard copy of any of the above mentioned documents. The information on this site has been prepared without taking account of the objectives, financial situation or needs of any particular individual.

For this reason, any individual should, before acting on the information on this site, consider the appropriateness of the information, having regards to the individual's objectives, financial situation and needs, and, if necessary, seek appropriate professional advice. Please consider the Exchange Traded Options Product Disclosure Statement before making any decisions about whether to acquire the financial product.

A Call Option gives the holder the right but not the obligation to buy the underlying security or index at or before the expiry date.