Call and Put Options in Australia are a financial instrument used by banks, traders and businesses to protect against substantial swings in the price of an underlying asset or trading market such as those on the Saxo markets.
A call option is a contract between two parties. The owner of the options, called an “optionee,” has the right but not the obligation to purchase shares at an agreed-upon price on or before a specific date. This act is known as exercising their rights under these contracts and agreements with holders who sell them for money. A put option works much as one might expect; however, users only have obligations when selling it. If necessary, they are obligated by law so long as that person fulfills their end (to either buy back stock at a pre-negotiated rate per share).
Low-risk investors typically use call options as they offer limited returns for guaranteeing protection from plunging prices. In contrast, high-risk investors will generally use put options as they offer greater rewards for accepting the risk of tying up capital.
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Here’s How You Can Use These Options in Australia
Pre-Emptive Strikes
Pre-emptive strikes are a helpful tool used by investors to lock in higher prices for stocks they wish to purchase or, conversely, lock in lower prices for those stocks they want to sell. Investors wanting to buy (or “go long”) stock and expect the price of that stock to increase substantially over the coming weeks/months should consider purchasing call options on that company‘s shares as protection against it falling.
By appearing first in line to buy the underlying security at the agreed-upon strike price should ensure not to miss out on any profits from a rising share price if your pre-emptive strike works successfully. In certain situations, companies will also employ this strategy by buying back their shares and “curtailing” downside risk by utilising a pre-emptive strike.
Covered Calls
Covered calls are an excellent way to generate income on shares that you own without selling them outright. This is achieved by selling call options on your underlying stock holdings at a pre-agreed strike price. By doing this, the seller receives the premium income for writing the contract for consideration for taking on the obligation of purchasing their shareholding should anyone exercise their option during that period.
To illustrate, let’s say you own 100 stocks in ABC company currently valued at $10 per share. You can sell ten call options with a strike price of $11 expiring in 3 months and receive $150 in the interim.
Protective Puts
A protective put is used by investors holding a significant shareholding in a company but concerned about market fluctuations’ downside risks. For instance, an investor may purchase 100 shares of XYZ Company at $10 per share. Still, because they are worried that XYZ may drop heavily over the next few months or even weeks, they hedge their portfolio by purchasing ten protective puts with an exercise price of $9 expiring in 1 month time.
By doing this, if the price of XYZ were to fall below $9 within that period, then it would be profitable for them to exercise their option and sell their shares for $900 (making $800 after deducting the cost of purchasing ten calls). At the same time, they can buy back 100 shares of XYZ for a total value of $900, resulting in a net loss on their trade of only $100.
Naked Calls/Puts
Naked Options in Australia are employed by investors who believe that the price of an index or security will be at any given level at expiration. For example, let’s say you think that ABC Company’s stock prices will fall within the next three months from its current levels of over $10 per share. You would look to purchase put options with a strike price of $9 expiring in three months.
If the option expires out-of-the-money with no consensus on where ABC Company’s share price will be, you will lose the entire premium spent on buying the option. On the other hand, if prices do indeed fall below $9 within that time frame, you would be able to use your put option to buy ABC Company stock for a discounted rate of $900 ($1000 less the cost of purchasing 10 Puts).
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