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| Options and Derivatives Questions |
Q. What is a
Warrant?
Q. What is an
Exchange Traded Option?
Q. What is a
Company Option?
Q. What is the
difference between Warrants and Exchange Traded Options (ETOs)?
Q. How do I
exercise ETOs?
Q. How can I
trade Options?
Q. Can I write
Options?
Q. What risks
are involved with Options trading?
| Answers to Options and Derivatives
Questions |
To trade either an option or a warrant,
the client must complete and return the associated agreement.
Sanford Application forms and Explanatory Booklets regarding
trading in options and warrants can be found on the Open an Account
page of the website, or for members, under the Account Services page.
What is a Warrant?
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.
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What is an Exchange
Traded Option?
An exchange traded options exercise price, expiry date, underlying
security and contract size are all standardised. In regard
to ETO's in an underlying company the company itself is not
party to the contracts traded rather exchange traded options
contracts are created between investors in the Options Market.
Like warrants and company options ETO's are subject to time
decay and expiry, traders should make themselves familiar
with these concepts.
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What is an Company
Option?
Options included in the share lists are rights given by a
company to take up its shares by a predetermined future date
at a certain price. Options not exercised by that date expire.
There are other kinds of options traded on the separate Options
Market (Refer to Exchange Traded Options above).
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What is the
difference between Warrants and Exchange Traded Options (ETOs)?
Warrants are similar to exchange traded options (ETOs). They
allow investors to trade price fluctuations in the underlying
asset without necessarily owning the underlying asset. There
are some differences between warrants and ETOs. For example;
?Unlike ETOs, warrants are generally not permitted to be short
sold;
?Warrants are traded on the ASX trading system, SEATS, whereas
ETOs are traded on the ASX options market.
. ETOs have standardised features where as Warrants do not.
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How do I exercise
ETOs?
You will need to notify our options operators that you would
like to exercise the option before 4.30pm on the expiry date.
They will then contact the options clearing house on your
behalf.
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How can I
trade Options?
Options trading is available via the Internet using the "Trading"
screen on the Sanford web site. Orders must be placed as day-only
and limit orders. Options trading are also available via the
phone.
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Can I write
Options?
Sanford Clients can sell/write to open a position if covered
by the underlying stock which has been delivered to us by
the other broker, ie is out of the T+3 settlement period.
At present Sanford does not facilitate the writing of naked
put or call options.
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What risks
are involved with Options trading?
Limited Life
Clients must be aware of the nature and operations of ETOs
which are based predominately on the exercise price and expiry
date of the option. ETOs expire at a specified point in time
in the future and only have value if the underlying securities
price is above (for a call option) or below (for a put option)
the exercise price at the expiry date. For this reason investors
must understand that ETOs have the potential to lose all their
value if the underlying security does not perform in the manner
they have anticipated when the option was bought.
Leverage
Derivatives are designed to provide control over a larger
number of units in the underlying security at a lower cost.
This provides the investor with the ability to leverage or
"gear" their investment and thus their capital outlay will
gain a larger exposure to the fully paid security. Having
larger exposure places the investor at risk of amplified decreases
in the value of the option if the underlying security price
moves adversely.
Warrants
Warrants are structured very similarly to ETOs and therefore
involve the same risks for investors. Before clients may commence
trading warrants, they must have read information provided
in the ASX Understanding Warrants Trading booklet and read
and signed a Warrant Client Agreement Form.
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