Listed options trading in Australia is a popular way to speculate on the financial markets. Options allow traders to gain exposure to and profit from movements in the underlying asset price without taking ownership of the asset itself. Click here to see the Saxo Markets.
However, options trading is not without its risks, and there are certain things that all traders need to understand before they start trading listed options in Australia.
Options are a derivatives market
Options are a derivative, which means they derive their value from an underlying asset. In listed options trading, that underlying asset is usually a share or index. When you buy or sell an option, you’re effectively betting on how the price of that underlying asset will move in the future.
If you’re correct in your prediction, you can make a profit. If you’re wrong, you’ll lose money. Understanding this before getting started in options trading is essential, as it can help you make more informed decisions about which options to buy or sell.
There are two types of options
The two most common options are call options and put options. Call options give the holder the entitlement, but not the duty, to buy the underlying asset at a specific price. Put options give the holder the authority, but not the obligation, to sell the underlying asset at a specific price.
Knowing which type of option you’re trading is essential, as it will affect how you can profit from your trade. For example, if you’re buying a call option, you’re betting that the underlying asset’s price will go up. If you’re buying a put option, you’re betting that the underlying asset’s price will go down.
There is risk involved in options trading
Options trading is risky, and it’s essential to understand the risks involved before getting started. One of the most significant risks is losing all of your investment if the underlying asset doesn’t move in the direction you predicted.
Another risk is that the options market is volatile, and prices can move quickly, meaning you need to understand what you’re doing before putting any money on the line.
Benefits of trading listed options in Australia
You can trade options on a range of underlying assets
One of the great things about options trading is that you can do it on various underlying assets. It includes shares, indices, and commodities, meaning you can trade options to suit your investment strategy and goals.
You can take advantage of leverage
When you trade options, you’re effectively using leverage, meaning you can control a large amount of the underlying asset with a small amount of capital. It can enable you to make more significant profits if your predictions are correct, but it also magnifies your losses if you’re wrong.
You can manage your risk
Options trading gives you the ability to manage your risk in several ways. For example, stop-loss orders can limit your losses if the market moves against you. You can also trade options with a more extended expiry date if you’re willing to give up some upside potential in exchange for downside protection.
Risks of trading listed options
It would be best to understand what you’re doing
Options trading is not for everyone, and it’s essential to ensure that you have a good understanding of what you’re doing before putting any money on the line. It means educating yourself about the basics of options trading and learning how to read options chains and use technical analysis.
You could be assigned
If you’re trading options, there’s always the risk that you could be assigned. It happens when the holder exercises the option and you’re forced to sell (or buy) the underlying asset at the strike price.
The premium could decay
Another risk is that the premium you pay for an option could decay over time. It is because options are a wasting asset, and their value declines as they approach expiration.
