Options are a popular investment tool, but many traders avoid buying options near expiry. There is often a misconception that options close at the market open on expiration day in Australia. We’ll explore why you should consider buying options near expiry in Australia and provide tips for doing so successfully. This link will also give you more information on the types of listed options available for trading locally.
What are options, and why trade them?
There are two types of options in Australia – call and put options.
Call options give the keeper the right to buy the underlying asset at a specified price on or before a specific date. Put options give the possessor the right to sell the underlying asset at a specified price on or before a specific date.
The critical difference between call and put option contracts is who performs the action as written in the contract. With a call option, the obligation is on the seller (writer) to sell the underlying asset if the buyer uses their option to buy. With a put option, the buyer (holder) is obligated to buy the underlying asset if the seller exercises their option to sell.
Some people trade options as a speculative investment, betting that the underlying asset price will rise or fall. Others trade options as part of a hedging strategy, aiming to offset potential losses in their portfolio. And still, others use options to generate income, sell options contracts and collect the premium payments. Whatever their reason for trading, all options traders need to be aware of the risks involved. Options are complex financial instruments and can be challenging to understand.
The benefits of trading options near expiry
Australia is a great place to trade options due to the country’s strong economy and stable political environment. The Sydney Futures Exchange is the most significant options market in Australia. It offers a variety of benefits for traders, including low transaction costs, tight bid-ask spreads, and ample liquidity. In addition, Australia’s proximity to Asia means that Australia is well-positioned to benefit from the growing demand for forex trading in the region.
Another benefit of trading options near expiry is that it allows traders to take advantage of time decay. Time decay is when an option’s premium declines as it approaches its expiration date. Since time decay accelerates as an option gets closer to expiration, trading options near expiry can be a great way to generate profits.
Finally, trading options near expiry also offer the advantage of limited risk. Since an option becomes worthless at expiration, the most a trader can lose is the premium paid for the option. It makes options a great way to speculate on future price movements without significant capital.
Things to consider when trading options near expiry
The Australian dollar is often more volatile during the Asian trading session than during European or North American sessions. It can impact the level of risk involved in trading near expiry. In addition, Australia has several currency-specific factors that can impact the value of options, such as interest rates, economic growth, and commodity prices.
The risks of trading options near expiry
Australia’s foreign exchange (FX) market is one of the most liquid and most prominent globally, with an average daily turnover of AUD$6.9 trillion in 2019. This activity has increased significantly in recent years, with the average daily turnover doubling since 2013. A large proportion of this trading is conducted by businesses seeking to hedge their FX exposure, but a significant amount is also traded speculatively.
A critical risk associated with trading options is typically having a fixed expiry date, and if the option is not exercised by that date, it will expire worthlessly. As such, options are often only suitable for traders with a high tolerance for risk.
Remember that options are leveraged products. It means that they can magnify both profits and losses. It is crucial to use stop-losses and never risk more than you can afford to lose.