There are key differences between Exchange Traded Options (ETOs) and Company Options.
An option is either the right to buy (a call option) or the right to sell (a put option) the underlying asset for an agreed price on or before the predetermined date.
Company options are call options which may be issued to shareholders of the company. For example, for every 1 share they hold, the shareholders may receive 1 company option. They then have the right, but not an obligation, to take up (exercise) the option to obtain additional shares in the company at a fixed price before an expiry date. Shareholders who are allocated company options but who do not wish to exercise them may sell them on the ASX once there is an established market. Because these options are issued to shareholders, the market for company options is likely to be made up of other shareholders wishing to sell their options, and new investors wishing to buy the options.
Another main feature of company options is that the terms and conditions of the contracts are determined solely by the issuing company and released in a prospectus document. This flexibility enables the issuing company to tailor specific terms according to their own needs and circumstances. Hence, company options are non-standardised contracts and investors, as with any investment, should always read the full prospectus document to make sure all terms are understood.
A company would issue company options for the purposes of raising capital. These funds are typically used by the company to take on new projects, pay off debt, etc. Company options can be readily traded in the secondary ASX equity market like shares and generally have sufficient buyers and sellers to provide the liquidity.
ETOs are standardised contracts, created by the ASX and trade on the Australian ETO Market. Call and put options exist over a wide variety of underlying stocks in the ASX and can be traded for a variety of purposes including: speculation, income generation, gaining leveraged exposure to a share’s price movement and hedging.
In the ETO market there are active market makers. These are market participants who are mandated under specific terms to provide a market, hence liquidity, for investors wishing to buy or sell an ETO. Company options do not generally have market makers. Because of their wide variety of uses and the availability of market makers to provide liquidity, ETOs are traded by both financial institutions and retail investors.
By Stephen Karpin, General Manager, CommSec
The views expressed in this article are those of Stephen Karpin, a representative of Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814. CommSec ABN 60 067 254 399 AFSL 238814 is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 23495 and a Participant of the ASX Group.
This article was produced by CommSec. Except to the extent that any liability under any law cannot be excluded, no liability for any loss or damage which may be suffered by any person, directly or indirectly, through relying upon any information or statement in this document is accepted by the Commonwealth Bank or CommSec or any of their directors, employees or agents, whether that loss or damage is caused by any fault or negligence on their part or otherwise. Commonwealth Bank and its subsidiaries do not guarantee the obligations or performance of CommSec or the products or services offered.
As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this information, consider its appropriateness to your circumstances and if necessary, seek appropriate professional financial and taxation advice.