FAQ

What would be the difference/advantage of buying as opposed to selling an option?

Question: I understand that you buy a call when you think that the market is going up, and you buy a put when you think it is going down. Does it mean the reverse when you sell a call and when you sell a put, ie sell call when trending down and sell put when…

What is the difference between an exchange traded option and a company option?

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…

Is it better to be a buyer or a seller of an option?

Question: What’s the difference between being a buyer or seller of an option? And what are the advantages and disadvantages of each? Response: An option is either the right to buy (a ‘call’ option) or the right to sell (a ‘put’ option) an underlying asset for an agreed price on or before the predetermined date….

What happens if I hold a put option on a stock that’s suspended from trade?

Question: If I hold a put options contract on a stock that is suspended from trade on the ASX, and is subsequently wound up, do I receive any return?   Response: The buyer of a put option has the right to sell the underlying stock at a particular price on or before a specified date. A…

What are covered calls and how can you profit from them?

Trading Strategy: The Covered Call Carl holds 1,000 Woolworths (WOW) shares, currently trading at $26.50. He receives company dividends as income from holding these shares, but he is looking for an opportunity to generate additional income from his investment. Carl’s market outlook for WOW is for the share price to remain steady over the short…

How does the ban on short selling affect options traders?

The idea of short selling is to profit in a declining market. As a result of the ban on short selling, whereby and investor/trader will sell stock that is either borrowed, or not yet owned, only to buy the stock back at the lower price, many have shifted to the use of options in order…

Should I buy options that are in the money or out of the money?

There is no wrong and right answer to this question. Whether you decide to buy in the money or out of the money, options will be totally dependant on your trading strategy and tolerance towards risk. However we will discuss some differences between trading options at various strike prices. In the money options are obviously…

Why buy an option rather than a share?

When we look at why people trade options as opposed to shares there is one common attraction and that being the element of leverage options provide. This means for a fraction of the price you can obtain the same exposure to the fully paid ordinary share by simply trading options. For example, if we are…

What are naked options and why are they risky?

A holder of a call option has the right, but not the obligation to buy an underlying share at a specified price, whilst the holder of a put option has the right, but not the obligation to sell the underlying share at a specified price. The process of selling new options is called ‘writing’. When…

Why is it bad to buy an option close to its expiry date?

I think that it is worth taking a quick step back and first discussing how we value options. If you were to dissect an option’s value into its components then the result would be two parts: Intrinsic Value and Time Value. Intrinsic Value is the option’s value if exercised on any given day, defined as…