Options Trading

Options are a type of contract to buy or sell a particular underlying asset. They are a called a derivative, and this is because they derive their value from something else. With an options contract, you have the right but not the obligation to buy or sell a specific commodity on or before a set date at a predetermined price.

This allows traders to set a fair value for trade that removes market fluctuations from the equation, and it also allow speculators to take advantage of price fluctuations. Some primary benefits of options trading are leverage (you gain access to a large amount of product for a minimal outlay), the ability to trade declining markets and the ability to hedge a position.

Options BrokersTo trade options on the ASX (exchange-traded options), you must use an accredited options broker. Many stock broking firms have accredited options brokers, and like regular stock brokers, they come either as a full-service/advisory broker or a discount/non-advice broker.

On top of this, options brokers are also accredited under two levels of specified knowledge - level 1 and level 2. According to the ASX, a level one accreditation is required in order to advise on warrants, taking options, selling options to close a taken position and writing covered call options. A level two accreditation is required in order to advise on writing options and multi-legged option strategies.

ASX regulates options broking to ensure a quality advice and service on ASX derivative products, but there are also other ways to trade options. These are called over-the-counter options and are normally provided by a well-known institution.

OTC options can offer a greater degree of customisation, but because they are unregulated, you must know exactly what you are doing and take necessary precautions to avoid unfair trading. OTC options are typically not as common as exchange-traded options on the ASX, but they do have their benefits and uses for certain traders.

Trading options involves a higher element of risk than some other trading methods, and beginners should seek professional advice about options if they are unsure about options trading.