Exchange Traded Option (ETO)
An Exchange Traded Option is either the right to BUY (A CALL) or the right to SELL (A PUT) an asset for an agreed price on or before a predetermined future date. A key point is that it is a "right", not an obligation, to buy or sell.
The four major components of ETO's are:

• NAME OF UNDERLYING STOCK
• THE EXPIRY MONTH
• THE EXERCISE PRICE
• THE TYPE OF OPTION - A CALL OR PUT

Warrants
A warrant is an option contract which is issued by a financial institution or other approved warrant issuer to holders and traded on the Australian Stock Exchange equity market. Warrants may be issued over securities such as shares in a company, a currency, an index or a commodity.

Covered Calls
Covered calls involve the writing, (selling), of exchange traded call option contracts over shareholdings of the underlying stock.
By selling a call option the writer receives a payment known as a "premium" in return for giving the buyer of the option the right to "call for" the stock at a pre-determined price, known as the "strike price".
An investor may write call options against their stock for a variety of reasons including:

• Downside protection, (limited)
• Income generation
• To supplement a sale price
• To reduce the cost of purchase

Reasons for Trading ETOs
Investors use Exchange Traded Options (ETO) to gain exposure to a particular share's, or sector's, movement over a limited period of time. Options are flexible instruments because they allow you to tailor the exact exposure and risk you wish to adopt for an anticipated move in the share price. Investors may use ETO's as an individual trading instrument, or to complement an investment strategy with equity share trading (i.e. Margin Lending, Hedging).
There are a number of different reasons to trade in options. You may trade options in order to:

• Earn extra income (Covered Call facility)
  An investor can earn income by writing call options against shares held on Sanford's HIN.
  As the writer of a covered call, the perception is that the price of the underlying share will remain steady or fall slightly. Writing call options in this situation gives the investor the opportunity to generate extra returns from a share portfolio while it remains stagnate.
  By writing an option the investor receives the option premium up-front. While the premium is credited to the account, there is a possibility that the short position may be exercised, delivering shares to the taker at the exercise price.
  

• Protect the value of your portfolio
  Put options allow investors to hedge against a possible fall in the value of shares in a portfolio. After Buying a put option, the sale price is locked for those shares for the life of the option, no matter how low the share price may go.
  Without using put options, in a market downturn you can only watch your shares fall in value, or sell them.
  Put options may also be seen as a form of insurance, if the underlying share price falls.
  

• Leverage
  Leverage is the most recognisable reason for trading in options for investors.
  With any increase in the price of the underlying share, the percentage return on the purchase of a call option will be greater than on the purchase of the underlying stock. Similarly, if the price of the underlying share falls, the percentage return on the purchase of a put option will be greater than the percentage change in value of the shares.
  The reason for the greater return on investment is because the investor is still exposed to the movements in underlying share prices, without the capital outlay that is otherwise needed when buying the underlying shares outright.
  However, just as leverage provides the potential to make high percentage returns, it also involves the risk of making large percentage losses. See Risks for further information.

• Time to decide
  By taking an option, the investor defers their decision to buy (call option) or sell (put option) the underlying shares.
  A call option locks in the purchase price for the shares if exercised. By paying the "premium", which is only a fraction of the price of the underlying share, you therefore have until the expiry day to decide whether or not to exercise the option and buy the shares.
  Likewise, taking a put option locks you into a selling price, giving your time to decide whether or not to proceed with the sale of the shares.
  In both cases, the most one can lose is the premium you have paid for the option in the first place.

Risks of trading ETOs.
Options, like any other trading instrument, involve risks. These risks, which are outlined below, must be considered before undertaking any option strategy:

• An option is a wasting asset.
  Option Premium is made up of two components - Intrinsic Value and Time Value. As time passes, the opportunities for your option to become profitable decrease, and the option's time value declines. This erosion of time value is called time decay. Time decay becomes more rapid as the expiry of the option nears.
• Losses may be incurred, even if the view on the underlying share is correct.
  Option premium prices are influenced by several factors other than the underlying share price. These include; time to expiry, volatility, dividends and interest rates. The acceleration of this movement in-line with other factors will determine the option premium.
• Leverage provides potential large gains as well as potential large losses.
  The leverage component of options allows investor to make large returns on investment, however these returns are subject to large losses if the strategy is incorrect.

Placing an online ETO order

• You will need to have a Sanford trading account activated for options trading;
• You need to have read and understood the ASX Understanding Options booklet, complete and sign an Options Client Agreement Form and Risk Disclosure Statement. These are available from the How To apply page;
• Orders can be placed on the available order pad located in the TRADING section of our web-site;
• All orders must meet the following parameters:
  • Price - options premium in cents;
  • Quantity - number of contracts (1 contract =1000 shares);
  • Day Only orders accepted.
• All Order must be designated as "Day Only".

Placing a phone order for a Covered Call

• You will need to have a Sanford trading account activated for options trading;
• You need to have read and understood the ASX Understanding Options booklet, complete and sign an Options Client Agreement Form and Risk Disclosure Statement. These are available from the How to Apply page;
• Your stock will have to be settled and CHESS registered with Sanford, or transferred to Sanford from another broker;
• Then upon request, transfer the stock to the OCH where it will be held as collateral;
• Covered calls can only be traded over the phone and incur option phone brokerage rates.

Market Makers
Market Makers play an important role in the ETO market. They are used to provide liquidity in the options market, allowing traders to trade in and out of option positions. Under ASX Business Rules, Market Makers are required to provide quotes in certain option series and, in return, are charged reduced trading fees.

Market Makers compete against one another while trading on their own account and at their own risk. They can be either individuals or firms. Each Market Maker is assigned two or more stocks or classes, for which they are obliged to quote a buy and sell price for a certain number of series. If a client wishes to trade in a series for which their are no orders in the system, the broker is also able to request a price from a Market Maker that deals in that option class.
Market Makers have obligations per class, which are as follows:

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