Listed options are securities that give the holder the right, but not the duty, to buy or sell a primary asset at a specified price on or before a specified date. Listed options are traded on exchanges and typically have standardized contracts.
Listed options are favored because they offer investors:
- Limited risk
If you’re interested in trading listed options, you can do so through a broker that offers access to the Sydney Stock Exchange (SSX). You’ll need to open an account with a broker and deposit funds to get started. Once your account is funded, you can begin trading.
Choose an underlying asset
After opening an account and funding it, the next step is to choose an underlying asset. The underlying asset can be a stock, commodity, currency, or index. For example, you might choose to buy options on the S&P/ASX 200 Index.
Select a contract type
You’ll need to select a contract type. There are two types of contracts available:
These give the holder the right to buy the underlying asset at a specified price by a specified date.
These give the holder the right to sell the underlying asset at a specified price by a specified date.
The contract type you choose will depend on your investment goals.
Choose a strike price
After selecting a contract type, you’ll need to choose a strike price. The strike price is when the holder can buy or sell the underlying asset. The strike price can be either more or less than the current market price of the underlying asset.
Select an expiration date
When the option expires and is no longer valid, it has reached its expiration date. You can determine this date by considering your investment goals. If you’re looking for a short-term investment, you’ll likely choose a shorter expiration date. If you’re looking for a long-term investment, you’ll choose a more extended expiration date.
Determine the premium
The premium is how much you pay for the option. Several factors determine the premium, including:
- The strike price
- The type of contract (call or put)
- The expiration date
- The underlying asset’s volatility
Place an order
Once you’ve determined the premium, you can place an order with your broker. Your broker will then complete the trade on your behalf. You can place various orders with your broker, including:
A market order is when you ask your broker to buy or sell an option at the current market price.
A limit order is when your broker to buys or sells an option at a specified price.
A stop order is when you ask your broker to buy or sell an option when the underlying asset reaches a specified price.
Monitor your position
After your order has been executed, you’ll need to monitor your position. You can do this by tracking the underlying asset’s price movements. If the underlying asset’s price moves in the direction you anticipated, your position will gain value. However, if the underlying asset’s price moves against you, your position will lose value.
Close your position
When you’re ready to close your position, you’ll need to place an order with your broker, and they will execute the trade and close your position.
What are the risks of trading with listed options?
The first risk to consider is volatility. Volatility measures the amount by which an asset’s price changes over time. Listed options are more volatile than other investments, such as stocks and bonds. Therefore, their prices can change rapidly and unexpectedly.
Another risk to consider is liquidity. Liquidity refers to the ability of an asset to be bought or sold quickly and at a fair price. Listed options are less liquid than other investments, such as stocks and futures contracts. Therefore, they may be more challenging to buy or sell, and their prices may be more volatile.
A third risk to consider is counterparty risk, which is that another party to a transaction will not honor their obligations. When you trade listed options, you’re exposed to counterparty risk because you’re relying on the other party (the broker) to execute the trade and fulfill their obligations.
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