Options enable traders to buy or sell a stock at an agreed price within a specified period—the value of the option changes as the market value of the underlying security changes.
An Australian call option gives you the right to buy shares in the company at a particular date for a set price – known as the strike price. A put option allows you to sell shares on or before a specific date at a set price – also known as the strike price.
When trading options, it is essential to remember that you don't necessarily have to exercise your rights – allowing you to buy and sell without necessarily taking ownership of the underlying security.
Australia options trading can be very successful, but it is also a high-risk strategy because the value of an option changes as its underlying securities changes in price. It is crucial to understand how options work before trading them.
Listed options are a popular type of derivatives traded by Australian investors. Listed options are classed as securities which means that you need to meet specific legal requirements if you wish to trade them. It is vital to choose an approved option broker before trading, making the process much easier for you.
It would be best to learn about your rights as an options trader, how the share market generally moves, and where your stock's underlying price may be heading over time. This information can help improve the likelihood of making successful trades.
Choose a broker
When trading options in Australia, it is crucial to choose a broker that has been approved by the Australian Securities and Investment Commission (ASIC). Characteristics of good brokers include competitive fees, quick settlement times and ease of use.
Understand what you are buying
When you trade an option, you have to understand your rights precisely. Each contract consists of 100 shares, so that the price will be quoted as cents per share.
For example, if ABC Company's option contract is worth $2.00 per share, each contract will cost you $200. If the market value of the stock changes, then this could affect the price of your option.
It is important to remember that options can expire, and if you haven't exercised your rights by the time of expiration, they will lose their value.
It's also important to remember that you don't necessarily have to exercise – allowing you to buy or sell without necessarily taking ownership of the underlying security.
Decide on a strike price
A strike price is an agreed-upon price for buying or selling a stock on or before a specific date in an option contract. In Australia, stocks have two types of strikes- a "listed" strike price which refers to those available on the ASX and an "unlisted" strike price which refers to stocks not traded on the ASX.
When deciding your strike prices, you should consider the direction of movement in the stock price and ensure that you can afford to hold the share until expiration.
Buy your option contracts
After deciding on a strike price, it's time to buy your option contracts. Australian options are quoted in cents per share, and there is a minimum value for each contract, which differs depending on what type of option you trade. For example, a call will have a minimum value of $1, while a put will have a minimum value of $0.10 per contract.
Remember that every cent movement will affect how much money you make or lose, so choose wisely! Contracts can usually be bought over the phone or traded electronically through your broker's trading platform.
Exercising your rights
Remember that you don't necessarily have to exercise your options. It allows you to buy or sell without taking ownership of the underlying security.
If your option ends up in the money and you choose not to exercise it, the contract will expire and become worthless. If this happens, you forfeit all of the money invested in the contract.
Learn from your experience
Although trading options can be very profitable, it is also a high-risk strategy because prices can change quickly over short periods. As with most financial strategies, the more time you spend studying what you are doing, the better your chance of success.
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