Understanding Options Trading - ASX

1 UnderstandingOptions Australian SharemarketDisclaimer of LiabilityInformation provided is for educational purposes and does not constitute financial product advice. You should obtain independent advice from an Australian financial services licensee before making any financial decisions. Although ASX Limited ABN 98 008 624 691 and its related bodies corporate ( ASX ) has made every effort to ensure the accuracy of the information as at the date of publication, ASX does not give any warranty or representation as to the accuracy, reliability or completeness of the information.

2 To the extent permitted by law, ASX and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information. SPAN is a registered trademark of Chicago Mercantile Exchange Inc., used herein under license. Chicago Mercantile Exchange Inc. assumes no liability in connection with the use of SPAN by any person or part of this Booklet may be copied, reproduced, published, stored in a retrieval system or transmitted in any form or by any means in whole or in part without the prior written permission of the ASX these product/s the market is operated by ASX Limited ACN 008 624 18 printed March 2015 Copyright 2015 ASX Limited ABN 98 008 624 691.

3 All rights reserved 2015 Exchange Centre, 20 Bridge Street, Sydney NSW 2000 Telephone: 131 279 you begin 2 What is an option? 3 Call Options 3 Put Options 4 Advantages of option Trading 5 Risk management 5 Time to decide 5 Speculation 5 Leverage 5 Diversification 5 Income generation 5 Option features 6 The 5 components of an option contract 61. Underlying securities/approved indices 62. Contract size 63.

4 Expiry day 64. Exercise (or strike) price 75. Premium 7 Adjustments to option contracts 8 Option pricing fundamentals 9 Intrinsic value 9 Call Options 9 Put Options 9 Time value 10 The role of dividends inpricing and early exercise 10 Parties to an option contract 11 The option taker 11 The option writer 13 Tracking positions and costs 14 How to track Options positions 14 Costs 14 Margins 15 Taxation 16 Tradeability 17 How can Options work for you? 18 Trading index Options 20 How are index Options different?

5 20 Settlement method 20 Some key advantages oftrading index Options 21 Examples of how Trading indexoptions can work for you 22 Differences between equityoptions and index Options 23 Pay-off diagrams 24 Call option taker 24 Call option writer 24 Put option taker 25 Put option writer 25 Summary 26 Risks of Options Trading 27 You and your broker 28 Your relationship with your broker 28 The paperwork: Client Agreement forms 28 Instructing a broker to trade Options 29 Role of Market Makers 30 ASX Clear Pty Limited 32 Options information on the ASX web site 33 Glossary of terms 35 Option contract specifications 37 Further information 382 Before you beginThe ASX Options market has been operating since 1976.

6 Since the market started, volumes have increased significantly. There are now over 60 different companies and the S&P ASX 200 share price index to choose from. A list of companies over which Exchange Traded Options ( Options ) are traded can be found on the ASX website, booklet explains the concepts of Options , how they work and what they can be used for. It should be noted that this booklet deals exclusively with Exchange Traded Options over listed shares and indices, and not company issued Options . Information on other ASX products is available by calling 131 279 or visiting To assist in your Understanding there is a glossary of terms on page sellers are referred to as writers because they underwrite (or willingly accept) the obligation to deliver or accept the shares covered by an option.

7 Similarly, buyers are referred to as the takers of an option as they take up the right to buy or sell a parcel of option contract has both a taker (buyer) and a writer (seller). Options can provide protection for a share portfolio, additional income or Trading profits. Both the purchase and sale of Options , however, involve risk. Transactions should only be entered into by investors who understand the nature and extent of their rights, obligations and is an option?An option is a contract between two parties giving the taker (buyer) the right, but not the obligation, to buy or sell a security at a predetermined price on or before a predetermined date.

8 To acquire this right the taker pays a premium to the writer (seller) of the illustrative purposes, the term shares (or stock) is used throughout this booklet when referring to the underlying securities. When considering Options over an index, the same concepts generally apply. From time to time Options may be available over other types of standard number of shares covered by one option contract on ASX is 100. However, this may change due to adjustment events such as a new issue or a reorganisation of capital in the underlying of the examples in this booklet assume 100 shares per contract and ignore brokerage and ASX fees.

9 You will most definitely need to consider these when evaluating an option transaction. For Options over an index, the contract value is based on a dollar value per point. Details can be checked in the contract are two types of Options available: call Options and put optionsCall Options give the taker the right, but not the obligation, to buy the underlying shares at a predetermined price, on or before a predetermined option exampleSantos Limited (STO) shares have a last sale price of $ An available 3 month option would be an STO 3 month $ call.

10 A taker of this contract has the right, but not the obligation, to buy 100 STO shares for $ per share at any time until the expiry*. For this right, the taker pays a premium (or purchase price) to the writer of the option. In order to take up this right to buy the STO shares at the specified price, the taker must exercise the option on or before the other hand, the writer of this call option is obliged to deliver 100 STO shares at $ per share if the taker exercises the option. For accepting this obligation the writer receives and keeps the option premium whether the option is exercised or is important to note that the taker is not obligated to exercise the option.