Versatile, sophisticated

What are options?

Although the origins of options can be traced back to the early ages- the establishment of the first modern, regulated exchange was not until 1973 with the Chicago Board Options Exchange (CBOE). Options contracts are now traded, primarily on shares, on most major exchanges around the world.

While somewhat more complicated than other derivatives- their advantages can be significant when they are used properly (as with any financial instrument). Generally speaking, they are a preferred instrument of more sophisticated short to medium-term traders, as well as of those who wish to use them to protect (hedge) other assets such as physical share portfolios.

Key considerations:

  • High versatility with many possible trading strategies and combinations thereof
  • Can be used to trade multiple asset classes
  • Options do expire
  • Both long term (years) and short-dated contracts are available (referring to expiry dates)
  • Relatively illiquid- particularly long-dated contracts
  • Relatively high trading costs
  • Can be used to gain high leverage- increases risk and reward potential

Buying or selling an option is buying or selling the right, yet not the obligation, to buy or sell a quantity of assets (most commonly shares) at certain price, before a certain time (expiry date) in the future. In these, an up-front premium is involved.

Generally, there are two types of options-Calls and Puts; a Call is the right to buy a quantity of assets, a Put is the the right to sell them. So, you could buy the right to buy, or sell the right to buy (Calls). Or, buy the right to sell, or sell the right to sell.

Whenever you buy a contract, you pay a premium. Conversely whenever you sell a contract (as the initial step), collect a premium.

Once understood, options can either be traded with relative simplicity or using highly sophisticated strategies- both of which can be very powerful.

“It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger

This website is owned and operated by Investor Unity Pty Ltd (ABN: 90 160 624 331). Any advice included in this website or correspondence is general advice only and is based solely on consideration of the investment or trading merits of the financial products alone, without taking into account the investment objectives, financial situation or particular needs (i.e. financial circumstances) of any particular person. In addition to its internal services, Investor Unity is compensated by brokers and other third parties by way of referral/affiliate and/or general partnership arrangements, via its websites and other communications.

Investor Unity is genuinely interested in your long-term trading & investment success. We advise you to take all necessary steps to ensure you have a good understanding of the products & services you’re considering investing in – particularly if they involve leverage. While Investor Unity takes every care to ensure that we only deal with the highest quality services, from throughout the industry, past performance is not a guarantee of future performance. Other risks are also invloved, some of which are listed at www.iu.com.au/risk, which should be read. Before making an investment or trading decision based on the general advice, the recipient should carefully consider the appropriateness of the advice in light their financial circumstances and should carefully review the PDS of the relevant financial product as provided by your investment broker. Past results are not a guarantee of future performance. Please contact us, to discuss any questions or concerns you may have- we are here to help.

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