Options trading in Australia can be a lucrative venture, but it is essential to understand the terminology before getting started. We’ll provide you with five need-to-know options trading terms that will quickly help you get up to speed. With a basic understanding of these terms, you’ll be on your way to successful options trading in Australia. After reviewing this article, you can look at this broker’s site for types of options traded locally and start trading to apply your knowledge.
A call option is a deal that gives the holder the right to buy an asset at a fixed price within a pre-set timeframe. They offer traders the ability to handle their risk while still having the potential to profit from upward movements in the market. The trader pays a premium to purchase the contract when buying a call option. If the underlying asset price rises above the strike price before the expiration date, the trader will profit from the difference between the two prices.
However, if the price falls below the strike price, the trader will lose their initial investment. Therefore, call options are a way to speculate on future price movements while limiting potential downside risk.
A Put option is an Australia-based forex trading investment strategy employed to generate profits by speculating on the future direction of an underlying asset’s price. The main advantage of this strategy is its flexibility, as it can be employed in a wide range of market conditions. Put options are also relatively easy to understand and trade, making them popular for new and experienced investors alike.
The trader must first choose an underlying asset and then speculate on whether they believe its price will fall or rise in the future. If the trader’s prediction is correct and the asset’s price does indeed fall, they will make a profit. However, if their prediction is incorrect and the asset’s price rises, they will incur a loss. Put options are therefore considered high-risk investments but can offer significant rewards for those who can correctly predict market movements.
A strike price is when an option buyer can buy or sell the underlying asset. The strike price is usually set at a round number of 1.2000 or 1.2500. When the underlying asset’s market price reaches the strike price, the option buyer can exercise their option and buy or sell the asset at that price. If the market price does not reach the strike price, the option will expire worthlessly, and the option buyer will lose their entire investment.
Australia’s forex trading market is one of the most active globally, and options expiration dates are a crucial part of the market. When an option expires, it gives the holder the right to buy or sell an underlying commodity at a price on or before a specified date. If the holder does not exercise their option, they will lose it and will not be able to benefit from any future price movement in the underlying asset.
Traders must be careful to choose their expiration date carefully. Australia’s options expiration dates are typically set based on the Australia-US exchange rate, as this is the most active currency pair in the country’s forex market. However, when choosing their expiration date, traders must also consider other factors, such as interest rates and economic data releases.
In the money/out of the money
In Australia, the term ‘in the money’ is commonly used to describe a profitable forex trading position. In other words, the option’s strike price is lower than the current market price of the underlying asset. If a call option is bought with a strike price of 1.2000 and the current market price of the underlying asset is 1.2500, your position would be in the money.
Conversely, an ‘out of the money’ option is not currently profitable. In our previous example, if the underlying asset’s market price were 1.1500, the option would be out of the money. While an in the money option will always have some intrinsic value, the money option will only have extrinsic (time) value. As such, options deep in or out of the money will typically have very little time value.