While this approach is risky and not recommended for new investors, you may be able to use the difference in risk exposure and smaller initial cost involved with options trading to diversify your portfolio, though you will have to take into account the complex risks of options. It is important for investors to understand that options are a strictly zero-sum game.
That is, in each transaction, one of the parties makes a gain at the expense of the other party. You need to make sure you fully understand the inherent risks involved. The position you take through options will be a leveraged position.
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As such, a change in the price of the option is bound to be disproportionate to a change in the price of the underlying share. Delta is positive for call options and negative for put options. If the share price changes in an unforeseen way, an option may completely lose its value. Here, if you have purchased a contract with units, you would have lost the entire premium you paid. In contrast, unless Telstra goes bankrupt, Telstra shares will never become completely worthless. So long as a Telstra stays afloat, there's always a possibility that its shares may increase in price over time.
Strategies used in the ASX Options Game
Since options have limited lives, they naturally decline in value at an exponential rate as they approach their expiry dates. While the potential loss you can face as the buyer of an option is limited to the premium you paid, as a seller, your loss can be unlimited. If the buyer chooses to exercise the option, you will be obliged to deliver the purchase or the sale of the shares at the preset price irrespective of their market value. The takeaway message for beginner investors is that, ideally, options should be used to complement their current shareholding positions.
Standalone positions should only be taken out after consultation with a broker or a financial adviser. You can see an example of how a call option works from the writer's perspective in the example below using Woolworths. The image above shows a list of Woolworths call and put options listed by the ASX. You will most likely be receiving one or more dividends in the next three years, so you don't want to sell your shares. However, you can further increase your income from your shareholding position by writing the contract shown above. But you will also bear the obligation to deliver Woolworths shares to the buyer any time before and including 27 June The buyer will not exercise the contract.
In percentage terms, this is a huge loss of See your savings, super, shares and loans side-by-side in the Finder app. We'll also track your spending and hunt down better ways for you to save. Pop in your phone number below to get your download link. By submitting your phone number, you agree to the Finder privacy policy and terms of use. Kylie Purcell is the investments editor at Finder. She has a background in business and finance news with her work featured on sites including Yahoo Finance, Sky Business and the Adviser Magazine.
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