Options are financial derivatives that give the holder the right — but not the obligation — to buy or sell an underlying asset (such as an ASX share or index) at a specified price (the strike price) by a specified date (the expiry date). Options trading is more complex and higher risk than buying shares and is generally suited to experienced investors who understand the mechanics and risks thoroughly.
What Are Options?
An option is a contract between two parties:
- Call option — gives the buyer the right to buy the underlying shares at the strike price before expiry
- Put option — gives the buyer the right to sell the underlying shares at the strike price before expiry
The buyer pays a premium (price) for this right. The seller (option writer) receives the premium and takes on the obligation — they must sell (for a call) or buy (for a put) if the buyer exercises the option.
ASX Exchange-Traded Options (ETOs)
The ASX operates a market for exchange-traded options over major ASX shares and indices. Options are available over large-cap stocks (CBA, BHP, WES, etc.) and ASX indices.
Key terms:
| Term | Definition |
|---|---|
| Underlying | The share or index the option is over |
| Strike price | The price at which the option can be exercised |
| Expiry date | The date after which the option is worthless |
| Premium | The price paid by the buyer for the option |
| Exercise | Using the right to buy (call) or sell (put) |
| In the money | The option has intrinsic value (call: current price > strike; put: current price < strike) |
| Out of the money | The option has no intrinsic value at current prices |
How a Call Option Works — Example
You believe CBA (currently $120) will rise. You buy a call option:
- Strike price: $122
- Expiry: 3 months
- Premium paid: $3 per share
- Each contract = 100 shares → premium cost = $300
Scenario 1 — CBA rises to $130:
- Exercise the option to buy 100 shares at $122 (saving $8 per share vs market)
- Profit = ($130 - $122 - $3) × 100 = $500 profit
Scenario 2 — CBA stays at $120 or falls:
- The option expires worthless
- Loss = $300 (the premium paid) — maximum loss on a bought call
How a Put Option Works — Example
You hold CBA shares (at $120) and want downside protection. You buy a put option:
- Strike price: $115
- Expiry: 3 months
- Premium: $2 per share → $200 per contract
If CBA falls to $100:
- Exercise the put to sell at $115 (saving $15 per share vs market)
- Net: your portfolio is protected below $115 (less the $200 premium cost)
This is similar to insurance — you pay a premium to limit your downside.
Risks of Options Trading
Option buyers:
- Maximum loss = premium paid (if option expires worthless)
- This can still represent 100% loss of capital invested in the option
Option sellers (writers):
- Naked call writing — selling calls without owning the underlying stock — carries theoretically unlimited loss potential
- Selling puts obligates you to buy shares at the strike price — potentially buying falling stocks
General risks:
- Time decay (theta) — options lose value as expiry approaches, all else equal
- Volatility sensitivity — option prices change with implied volatility even if the underlying price stays constant
- Complexity — options strategies can be very complex; mistakes are costly
Who Trades Options in Australia?
Options trading in Australia is primarily done by:
- Sophisticated retail investors (self-directed, usually with significant investing experience)
- SMSF trustees (some use options for income generation — “covered calls” — or hedging)
- Institutional investors (hedging large share portfolios)
For most retail investors — particularly beginners — shares and ETFs are more appropriate. Options are complex instruments where significant losses can occur if the mechanics are not thoroughly understood.
How to Access ASX Options Trading
To trade ASX exchange-traded options, you need a broker that offers options trading. In Australia:
- CommSec offers options trading through its desktop platform
- Interactive Brokers offers full options functionality
You will need to complete an options assessment to demonstrate understanding of the risks before trading.
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- Investing hub
Frequently Asked Questions
Are options trading in Australia risky? Yes. Options are complex derivatives and are riskier than simply buying shares. Option buyers can lose 100% of the premium paid if the option expires worthless. Option writers (sellers) can face much larger losses, particularly when writing naked calls. ASIC classifies options as complex financial products requiring appropriate disclosure and assessment of investor knowledge.
Can I use options to generate income? A common income strategy is the “covered call” — selling a call option over shares you already own. You receive the premium as income. If the share price rises above the strike price, your shares may be “called away” at the strike price (missing further upside). Covered calls can reduce upside potential while generating modest income. This is a legitimate strategy used by some sophisticated SMSF investors.
Do I need special permission to trade ASX options? You need to complete an options knowledge assessment with your broker before you can trade. This is an ASIC requirement to ensure investors understand the risks. Most mainstream Australian retail brokers require this step before granting options trading access.
This article provides general financial information only. Options are complex financial products. Consider your experience, financial situation, and risk tolerance carefully before trading derivatives. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.