An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell a security at a specified price (the strike price) on or before a specific date (the expiration date). Options are derivative instruments, meaning their value is derived from the price of another security. When it comes to stock options, the underlying security is the stock itself.
There are two types of options: call options and put options. A call option gives the buyer the right to buy a security at the strike price, while a put option gives the buyer the right to sell a security at the strike price.
The Australian stock market
The Australian stock market does have options available for trading. However, not all stocks on the ASX have options listed. There are always only a limited number of stocks with listed options, and most of these are large, well-known companies.
A quick review of the Australian stock market will show several different types of investment options available to investors. These include, but are not limited to:
- Stocks or shares in publicly traded companies
- Bonds or debentures issued by governments or corporations
- Investment funds that pool money from a large number of investors and invest in a variety of assets
- Exchange-traded funds are funds that track an index or basket of assets
- Property, including commercial and residential property
- Infrastructure, such as toll roads, ports, airports and energy infrastructure
Options can be used for several different purposes
Options available on the Australian Stock Exchange can be used for various purposes, such as;
Hedging
A hedged position is when an investor uses options to reduce the risk of owning securities. For example, an investor might use a put option to hedge his exposure to a particular stock. This would involve buying a put option on the stock with a strike price below the current market price. If the stock falls in value, the put option will increase in value and offset some of the losses on the stock.
Speculation
Speculators buy options with the hope that the underlying security price will move in a particular direction. For example, a speculator might buy a call option on a stock with a strike price above the current market price. If the stock price increases, the call option will increase in value, and the speculator will profit.
Arbitrage
Arbitrageurs take advantage of price discrepancies between different markets. For example, an arbitrageur might buy stock in one market and sell a put option on the same stock in another market. If the stock prices and the put option are different, the arbitrageur will profit.
Flexibility
One of the most significant benefits of trading in options is that it gives investors a high degree of flexibility. You can tailor your investment portfolio to meet your specific needs and goals with options.
Potential for high returns
Another key benefit of trading in options is the potential for high returns. When used effectively, options can provide investors with substantial profits.
Liquidity
One of the most significant advantages of trading on the Australian stock market is the high degree of liquidity, and this means that you can buy and sell stocks quickly and easily without having to wait for long periods.
Access to a wide range of stocks
The Australian stock market offers investors access to a wide range of stocks from large and small companies. This gives investors a greater level of choice when building their investment portfolio.
Finally
There are many reasons why trading in options on the Australian stock market can be a wise investment choice for investors. With its high degree of liquidity, access to a wide range of stocks, and potential for high returns, the Australian stock market offers investors a wealth of opportunities to grow their wealth. So if you’re looking for an exciting and profitable way to invest your money, consider trading in options on the Australian stock market. New traders are advised to use an experienced and reliable online broker from Saxo markets.