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It says on the ASX website that options lets me buy shares for less than their current price. Can you please explain what this means.

 The Exchange Traded Options Market consists of two types of options

1.    Calls

2.    Puts

With the holder of a call option having the right, but not the obligation to buy stock at a particular price, up until a certain day.

Eg. $37.00 BHP Call, expiring October.

This means that the holder of this option has the right but not the obligation to buy BHP shares at a price of $37.00 up until the end of October, regardless of the underlying price of BHP. With the price stipulated in the option known as the “strike” price, and the month it expires being known as “expiry”.

In order to be the holder of one of these options, you must buy it on the Exchange Traded Options Market for a premium. The premium price will depend on what the share price is at the time of purchase, along with how much time is left on the option until expiry. If the price of the stock is well below the strike price of the option, then the premium will be less then when the strike price is much closer or higher to the underlying share price. Along with this, the longer dated the option, the higher the premium it will attract.

So, if in the above example, the holder of the option was to have paid $0.50 for their option, they would need to stock to be worth more than $37.50 at expiry in order to have profited from their trade. If this is the case, then the total purchase price for the stock will be as follows:

Option Premium + Strike Price = Purchase Price

$0.50 + $37.00 = $37.50

So if the underlying stock is trading above $37.50, by holding the call option, a person is able to buy shares for less than their current price.

By Matt Comyn, General Manager, CommSec

Important Information

The views expressed in this article are those of Matt Comyn, a representative of Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814.  Commonwealth Securities Limited (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 and a Participant of the ASX Group and the Sydney Futures Exchange. 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 advice.

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