What type of advice is offered? General; Seasonal spread and Option spread analysis
Who should be trading futures and options? Trading futures and options is not for everybody. There are risks in trading that would not be suitable for each and every investor. Some investors prefer the security of a guaranteed return for example. Futures and options markets do not offer this guarantee and losses can result. However, there is potential to make substantial returns from sensible trading.
Aren’t these markets risky? All investment products have a degree of risk and futures and options are no exception. While the Option1 advice comes directly from licensed and experienced professionals, there may be events in the market place, such as acts of terrorism, that cannot be forecast. You should only invest with risk capital, not money you cannot afford to lose.
On what markets does Option1 offer general advice?
Commodity futures and options such as Soybeans, Gold and Coffee.
Financial futures and options such as Gold/Silver Index, 10yr Treasury Notes and Eurodollars.
Additionally, Option1 will scan other markets for opportunities.
Why choose these markets? These are the most actively traded or ‘liquid’ markets in the world. A liquid market is essential in trading so as to be able to get in and out of positions in both quiet and busy times.
Will I have losses? Yes you will have losses, trading these markets will result in losses and if you cant tolerate losing positions then trading is not for you.
Australian markets lack diversity and liquidity and therefore can pose an unnecessary risk. Trading an international market is as easy as trading an Australian market and in most case you can use the same broker.
How much time is required? As little as a few minutes per day.
Do I have to stay up all night watching overseas markets? No, that’s our job. All information is updated by midday Sydney time ready for the trading session ahead.
How often will the system trigger a new strategy? Anywhere between three and five times per month.Our focus is on the quality of a strategy, not quantity.
Information on current strategies is updated daily.
How much should I start with? It is recommended to start with at least $25,000AUD, but that choice is yours. The system can also be used as a learning tool and followed for some time before placing actual orders with real money. Most new user are trading between $40,000 and $80,000.
Is this a black box system? No. At Option1 we believe in complete transparenty of information. All users are encouraged to learn and understand the ins-and-outs of trading. Option1 is dedicated to the continual education of the trader with a downloadable training manual, electronic study questions and a regular newsletter.
Additionally the information itself is no secret to our members and can be adjusted to suit the individual’s needs.
Is Option1 suitable for short or long term investors? It is probably more suited to the long term investor. While Option1 positions tend to last for just 2-6 weeks, the system is designed to make profits over the long-term and therefore is not suitable for those looking to earn a ‘quick buck’.
IMPORTANT NOTE
Please note that before entering into any transaction, you should obtain and read the relevant Product Disclosure Statement and should seek independent advice to ensure this is appropriate for your particular financial objectives, needs and circumstances. We recommend that you also obtain independent taxation and accounting advice in relation to the impact of any trading (and any incidental foreign exchange) gains and losses on your particular financial situation. The taxation consequences of trading in futures and options can be complex and will differ for each individual’s financial circumstances, and your tax adviser should be consulted prior to entering into or disposing of an option.
American Style Option An option which can be exercised at the Exercise Price on any day up until and including the day of expiration.
Call Option An option which gives the buyer the right, but not the obligation, to buy the underlying asset, contract or commodity from the seller at (or before) a future point in time (the Expiry Date) at a pre-defined price (the Exercise Price).
Clearing The process by which futures and securities contracts and options executed on a options market are registered and cleared in the name of a Clearing Participant with the relevant Clearing & Settlement Facility.
Clearing House Means any clearing and/or settlement facility, as that term is defined in Section 768A of the Corporations Act, from time to time operating in or authorised or appointed by any Licensed Market on which Option1 may trade, or where the market is not a Licensed Market, any other clearing house.
In practical terms a clearing house is a body that guarantees the fulfilment between Clearing Participants of all options traded on the relevant exchange. The clearing house holds all Initial and Variation margin requirements of the Clearing Participants who have to cover their commitment with the Clearing Participants on a day to day basis. The clearing house handles all cash settlement within the exchange market and provides the documentation necessary to record all business on the relevant exchange.
Clearing Participant Means a participant of a Clearing House.
Corporations Act The Corporations Act 2001(Cth) as amended from time to time.
Option Option means an arrangement as defined in section 761D of the Corporations Act and, for the purpose of this webpage, is limited to options which are option contracts as defined in the Corporations Act prior to the commencement of the Financial Services Reform Act.
European Option An option which can only be exercised at the Exercise Price on the Expiry Date.
Exercise Price The price at which the option holder may buy or sell the underlying instrument, as defined in the terms of the option contract.
Expiry Date In relation to an option, the date on which the option expires as designated in the contract specifications.
Initial Margin The minimum amount of cash or security that a client must have on deposit to establish a position in a Option.
Margin Call A demand for additional funds to be deposited in an account to meet margin requirements either because of adverse price movements or an increase in Initial Margin requirements.
Market Order An order to buy or sell a Option immediately at the current price.
Premium The purchase price paid to buy an option.
Put Option An option where the buyer has the right, but not the obligation, to sell the underlying asset, contract or commodity at or before a future point in time (the Expiry Date) at a pre-defined price (the Exercise Price).
Strike Price Another term for the Exercise Price.
Variation Margin The amount of funds called to cover the difference between the current mark to market value of the option and the previous mark to market value of the option.
PURPOSE OF OPTIONS TRADING
Exchange-Traded Options are generally used for one of two purposes – hedging or speculating. Exchange Traded Options contracts can provide those who deal in the underlying financial product with a facility for managing the risks associated with changing prices for those investments. Where Exchange-Traded Options are used in this way, the strategy is known as “hedging”. Exchange-Traded Options are also traded by speculators, who trade in the anticipation of profiting purely from changing prices in the traded commodities, financial instruments or indices.
In cases where you are speculating it is suggested that you do not risk more capital than you can afford to lose. A good general rule is never to speculate with money which, if lost, would alter your standard of living.
Futures Options contracts convey on holders the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) the futures contract at a specified price (the strike price) on or before a given date (expiration day). After this given date, the option ceases to exist. The seller of an option is, in turn, obligated to sell (in the case of a call) or buy (in the case of a put) the futures contract to (or from) the buyer of the option at the specified price upon the buyer’s request.
Futures option contracts usually represent 1 futures contract.
Strike prices (or exercise prices) are the stated price per futures contract for which the asset may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract. The strike price, a fixed specification of an option contract, should not be confused with the premium, the price at which the contract trades, which fluctuates daily.
Generally, at any given time a particular option can be bought or sold with one of more expiration dates.
Buyers and sellers in the exchange markets, where all trading is conducted in the competitive manner of an auction market, set option prices.
You should clarify whether the option you are dealing with is an American or European option prior to entering into the transaction. This will differ in accordance with the operating rules of the exchange you are trading on. European options can only be exercised on the expiry date and not before. American options can be exercised at any day up until and including the day of expiration. Some, although few, exchanges offer both American and European contracts.
Types of options The two types of options are Calls and Puts. A call option gives its holder the right to buy 1000 shares of the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the option has the obligation to sell the shares.
The opposite of a call option is a put option, which gives its holder the right to sell the underlying security at the strike price, anytime prior to the options expiration date. The writer (or seller) of the put option has the obligation to buy the underlying.
Index options give you exposure to the securities comprising a share market index.
The value of an index option varies according to movements in the underlying index.
If a client buys an option, the potential loss to the client is limited to the premium, which is non-refundable.
If the option buyer pays the full premium at the time the option is traded, they will not be called upon to pay “margins”. If the buyer paid only an initial deposit, they may be called upon to pay margins up to the full value of the premium (but no more). A client who sells the option has potential unlimited liability to the holder of the underlying futures contract. However, they will only have limited profit potential, as a seller cannot earn more than the premium for which the option is sold.
An out-of-the-money option is, in relation to a call option, where the strike price is higher than the current market level or a put option where the strike price is below market i.e. an option which cannot be exercised at a profit. A client contemplating purchasing a deep out-of-the-money option should be aware that the chance of such an option becoming profitable is, ordinarily, remote.
KEY BENEFITS OF EXCHANGE-TRADED OPTIONS
Exchange-Traded Options have a number of advantages, the most significant of which are outlined below:
Risk Management: As a risk management tool, investors can hedge (protect) their portfolio from a drop in value. For example, purchasing put options allows investors to hedge against a fall in the value of the underlying financial product;
Leverage: The initial outlay for an option contract is not as much as investing directly in the underlying financial product. In the case of individual share options, trading can enable investors to benefit from a change in the price of the underlying share without having to pay the full price of the share. An investor can therefore purchase an option (representing a larger quantity of the underlying product) for less outlay and still benefit from a price move in the underlying product. The ability to make a higher return for a smaller initial outlay is called leverage. Investors however, need to understand that leverage can also produce increased risks (see section 11);
Novation: Given the process of novation there is limited counterparty risk when trading Exchange-Traded Option contracts as the Clearing House for the relevant exchange stands behind the contract guaranteeing performance of the transaction;
Market positions and strategies: Options do not require a rising market to make money. Investors can profit from both rising and falling markets depending on the strategy they have employed. Strategies may be complex and will have different levels of risk associated with each strategy;
Flexibility of Market positions and strategies: The flexibility of entering and exiting the market prior to expiry enables an investor to take a view on market movements and trade accordingly. In addition, the variety of option combinations allow investors to develop strategies regardless of the direction of the market;
Writing Options: Investors can earn income by writing call options over a portfolio of shares already held. As a writer of options, the investor will receive the premium amount up front but will be required to pay margin or lodge the underlying shares as security. The risk is that the writer may be exercised against and be required to deliver their shares to the buyer at the exercise price.
KEY RISKS OF EXCHANGE-TRADED OPTIONS
The risk of loss in trading Exchange-Traded Options contracts can be substantial. An investor should carefully consider whether trading is appropriate for them in light of their financial circumstances, situation and needs. In deciding whether or not you will become involved in trading options, you should be aware of the following matters:
Leverage: Exchange-Traded Option contracts are leveraged financial products and as such selling or writing Exchange-Traded Options may result in potentially unlimited losses that are greater than the amount that you deposit with your broker. The high degree of leverage that is obtainable in trading Exchange-Traded Option contracts because of small margin requirements can work against you as well as for you. The use of leverage can lead to large losses as well as large gains, when options are written/sold;
Loss of margin: You could sustain a loss, greater than and not limited to, the initial and variation margin that you have/had deposited with your broker to establish and/or maintain an Exchange-Traded Options contract;
Payment of losses and variation margin: If the options market moves against your position, you may be required, at short notice, to deposit with your broker a variation margin in order to maintain your position. Those additional funds may be substantial. If you fail to provide those additional funds within the required time, your position may be closed out at a loss and you will be liable for any shortfall in your account resulting from that failure;
Close Out: Under certain market conditions, it could be difficult or impossible for you to close out a position. This can, for example, happen when there is a significant change in prices over a short period;
External market forces: Under certain market conditions it may also be difficult or impossible for you to manage the risk of open positions by entering into equivalent and opposite positions in another contract month, on another market or, where relevant in the underlying instrument;
Relationship to Underlying Market: Under certain market conditions the prices of Exchange-Traded Option contracts may not maintain their usual relationships with the underlying market;
Delivery: Where you have a position in a deliverable Exchange-Traded Option and you hold this open position going into the delivery period, you may be required to effect physical delivery of the underlying commodity if your position is matched;
Limit Orders: All Exchange-Traded Option contracts involve risk and there is no trading strategy that can eliminate it. The placing of contingent orders (such as a ‘stop-loss’ order) may not always limit your losses to the amounts that you may want. Market conditions may make it impossible to execute such orders;
Spread Orders: A “spread” position (which involves the simultaneous purchase and sale of options) is not necessarily less risky than a simple “long” or “short” position;
Selling Options: If you propose to trade in options, the maximum loss in buying an option is the amount of the premium, but the risks in selling an option are potentially unlimited;
Option Expiry: Options have a limited life span as their value erodes as the option reaches its expiry date. Hence, it is important to ensure that the option selected meets your investment objectives;
Operational Risk: You may experience losses due to the systems failures which may either relate to the brokers execution systems or the exchanges trading and/or clearing systems;
Market factors: The Exchanges and Clearing Houses have discretionary powers in relation to the market and operation of facilities, for example, power to suspend trading, restrict exercise, impose position limits, terminate open positions etc in order to ensure fair and orderly markets are maintained;
Legal/Regulatory changes: Changes in taxation and other laws, government, fiscal, monetary and regulatory policies may have a material adverse effect on your dealings in Exchange-Traded Options.
Foreign Currency Fluctuations: If a client trades in Exchange-Traded Options contracts denominated in currencies other than Australian dollars a client may lose money due to exchange rate fluctuations. Accordingly, your profits or losses may be affected by fluctuations in the relevant foreign exchange rate between the time the order is placed and the time the position is closed, liquidated, offset or exercised;
Offshore Markets Regulations: Participation in foreign Exchange-Traded Options transactions involves the execution and clearing of trades subject to the rules of that foreign options exchange and the laws of the country in which that exchange is domiciled;
Offshore Markets Protection: Neither the Australian Securities and Investments Commission (ASIC) nor the domestic exchanges regulate activities of options exchanges, including the execution, delivery and clearing of transactions, nor do they have the power to compel enforcement of the operating rules of a foreign options exchange or any applicable foreign laws. Generally, the foreign transaction will be governed by applicable foreign law. This is true even if the options exchange is formally linked with an exchange in Australia. Moreover, such rules and regulations will vary depending on the foreign country in which the transaction occurs;
Offshore Markets Funds: Clients who trade on foreign options exchanges may not have the benefit of protective measures provided by the Corporations Act 2001 (Cth). In particular, clients’ funds may not be subject to the same protections afforded by Australian segregated client account controls nor the benefit of domestic regulatory body fidelity funds;
Systematic Risks: A client may incur losses that are caused by matters outside their broker’s control. For example, a regulatory authority exercising its powers during a market emergency may result in losses for the client. A regulatory authority can, in extreme situations, suspend trading or alter the price at which a position is settled. This could also result in a loss to the client;
Market Disruptions: A market disruption may mean a client is unable to deal in a options contract when desired, causing the client to suffer a loss as a result. Common examples of disruption include the “crash” of a computer based trading system, fire or other exchange emergency. Also a regulatory body could declare an undesirable situation has developed in a particular contract and suspend trading; and
Cooling Off: There are no cooling-off arrangements for Exchange-Traded Option contracts. This means that when you purchase an Exchange-Traded Option, you do not have the right to return the product, nor request a refund of the money paid to acquire the product. Should you change your mind after entering into an exchange traded Option, you can close out your position by entering into the opposite transaction (although loss may be incurred in doing so).
Market Volatility: Exchange-Traded Options markets are subject to many influences which may result in rapid currency fluctuations and reflect unforeseen events or changes in conditions with the inevitable consequence being market volatility. Given the potential levels of volatility in the Exchange-Traded Options markets, it is therefore recommended that you closely monitor your positions with your broker at all times. Exchange-Traded Options markets are highly volatile and are very difficult to predict.
This is only a summary of the significant risks of using Exchange-Trade Options. Option1 strongly recommends that you obtain independent advice before proceeding with a transaction.
