What are ETOs?
Exchange Traded Options (ETO) are versatile, leveraged derivative securities. ETOs can be used to hedge existing investments, reduce risk or make speculative trades. In addition, because of the flexibility offered by ETOs, investors are able to employ a large range of strategies, from simple to complex, to trade in every market.
Gleneagle Securities gives clients access to trade ETOs on the ASX. In addition, our specialist advisors can provide assistance with executing complex trading strategies, ensuring that you are well informed when making your investment decision.
How do ETOs work?
There are two types of ETOs that are the basis for all options strategies, Call Options and Put Options. Both can be sold (written) or bought (taken).
- Buyers (takers) of Call Options have the right, but not the obligation to BUY a specified volume of an underlying security for an agreed price, on or before a specified expiry date. Buyers of Call Options benefit from limited downside risk, but pay a premium for the option.
- Sellers (writers) of Call Options have the obligation to SELL a specified volume of an underlying security for an agree price up until expiry of the option. Sellers of Call Options benefit from earning premiums, but have unlimited downside risk.
- Buyers (takers) of Put Options have the right, but not the obligation to SELL a specified volume of an underlying security for an agreed price, on or before a specified expiry date. Buyers of Put Options benefit from limited downside risk, but pay a premium for the option.
- Sellers (writers) of Put Options have the obligation to BUY a specified volume of an underlying security for an agree price up until expiry of the option. Sellers of Put Options benefit from earning premiums, but have unlimited downside risk.
Long Options Limit Downsides
When you open a long position with ETOs (buy a call or a put) your downsides are limited to the premium you paid for the position. In this way long Options benefit from limited downsides and unlimited upsides.
ETOs for major indices, such as the S&P 500, exist for investors who want to trade a diversified portfolio of stocks rather than individual stocks.
Many Strategic Alternatives
ETOs enable investors to employ various trading strategies, ranging from simple to complex. Through combining options, you can trade under any market condition, be it rising, falling, volatile or flat.
Minimal Initial Investment
When buying ETOs, you only pay a premium and can potentially make a higher return on investment than if you invested in the underlying security directly.
Protect Your Portfolio
Utilise ETOs to hedge your portfolio no matter its size or composition. For example, if you hold a long position in a single stock, you can employ various trading strategies with ETOs to protect it from downside movements.
If you are expecting low volatility, writing (selling) ETOs allows you to benefit from your trading perspective by receiving premium upfront.
Unlimited Downsides for Sell Side
While ETO writers receive premium, they are exposed to potentially unlimited downsides as they have the obligation to fulfill the terms. Such positions are characterised by limited upsides and unlimited downsides.
As a leveraged financial product, ETOs carry significantly more risk than their underlying securities. While leverage allows traders to benefit from higher returns, it can also lead to losses greater than the initial investment.
Because ETOs have an expiry date, they are subject to time value. Time value decay is initially slow, but accelerates as the option nears expiry.
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How do I place ETO trades with Gleneagle?
ETO trades can be placed by either calling up Gleneagle brokers directly or through our online webiRESS platform.
What is the minimum order quantity I need to place for an ETO trade?
The minimum order size is one options contract.
What is the size of an ETO Contract?
Contract sizes are typically for 100 shares.
How do I calculate the premium paid for a contract?
To calculate value of a premium, multiply the quoted premium by the size of the contract. For example, if Rio Tinto’s option premium is quoted at $0.55, a single contract will be $55 ($0.55 x 100 shares per contract)
How long do i have to meet a margin call?
From the time you receive a margin call notification, you have 24 – 48 hours to deposit additional collateral. During times of rapid market movements, you may be required to provide additional collateral earlier. Should this be the case, Gleneagle Securities will notify you.