Options attract traders due to their versatility, flexibility, and profitability. They are a form of derivative trading that enables people to transact on securities in the Australian stock market.
The market's volatility has made Options trading a popular alternate strategy to limit risk, protect existing share portfolios against a decline in value, and make some money in periods of low capital growth.
You will learn in this guide the fundamentals of options trading in Australia, the pros and cons, the best options trading platform, and the steps to follow to get started for beginners.
1. What Are Options?
Options, also called Exchange Traded Options, are derivative financial instruments with no intrinsic value. They are contracts that derive their value from their underlying stock.
Options are flexible tools that help traders refine their existing trade strategies. It allows the investor to forecast the future price of the financial market. Rather than owning tangible, physical assets, you can transact (buy or sell) options before the expiration date to generate profits.
The Australian Securities and Investments Commission is the body that regulates options and binary options.
2. What Is Options Trading?
Options trading implies an exchange or buying and selling of options. The financial contract offers investors the right and not compulsion to trade in an underlying asset at a specified price if it reaches beyond that price within a specified period.
The price you pay to purchase the option is called the 'premium'.
3. What Can You Trade With Options?
The world of Options encompasses various types of trading, ranging from commodities, stocks, currencies, indices, bonds, and ETFs. You only need to predict the asset price and wait for the outcome.
4. Why Should You Trade In Options?
Trading options are promising, especially when the market is flat and bearish. With it, you can limit your risk exposure and protect the value of your existing share portfolio in the falling market.
Although many consider it risky and more complex than standard stock trading, it can protect your stock investment value against losses and augment profits. The trader's potential loss from an Options trading strategy is limited to the premium paid.
Furthermore, Options can also help you generate income in times of low capital growth. It benefits traders regardless of whether the commodity, stock, or forex prices rise or fall.
5. How Does Options Trading Work?
Investors can trade in Options in the following ways:
6. Advantages Of Options Trading
The best benefit of trading in options is the upside potential, with losses limited only to the option's premium.
They are helpful as a source of risk hedging and leverage.
Short-term options trading can also help you earn some additional money by investing. A covered call can help you generate income immediately in a sideways market.
Is it profitable to trade options? Yes. You can make higher returns than directly investing in stocks with a smaller initial outlay.
Options trading strategy allows you to benefit from fluctuations in a share price without needing to pay the share price.
Unlike paying the price of shares, Options trading enables investors to diversify their portfolio with a smaller initial outlay.
The Call Options give you time to decide on purchasing shares. By paying a fraction of the shares in the form of a premium, you can lock in the buying price, and you can buy those shares any time before the expiry date of your option.
Options trading enables you to implement an array of option trading strategies in several market conditions (falling, rising, or flat). You can choose the one that best suits your needs.
7. Are Options Trading Better Than Stocks?
Time Decay
The main drawback of Options trading is if the stock price stays the same as per your estimations within a specified period, you will lose your entire premium.
However, this is not the case with "direct investment in stocks" because the share price can come to your estimated price after some time (after the options expiry).
Can Amplify Your Losses
The leverage that can get you higher profits in Options Trading can also result in higher losses if the stock price doesn't go in your favour until your Options expire.
Though Options trading may be more affordable than regular stock trading, it is more time-bound. Only experienced investors who are 110% sure that the stock price will reach its price target at a set duration should invest in Options Trading.
Option writers (who sell Options) may face unlimited losses when the contract they sell moves against their speculations. This way, they would lose more than any premium received.
Prone To Market Risks
It is necessary for traders to know the nature of the stock market and that it is uncertain and influenced by several socio-economic factors. A "time-bound" options trading may fail due to unforeseen circumstances, but if you are a long-term player in the stock market, you will eventually win the race.
Can't Participate In Corporate Action
Both the Call option taker and the Call Option Writer are not eligible to receive dividends and participate in voting on the underlying shares until they transfer the shares.
Complexity
Options Trading is more complex to understand and execute than regular stock trading. It is for experienced investors and risk-takers who understand in which direction the stock price will move in the near term.
However, if you are a beginner trader, risk-averse, willing to hold stocks for the long term, and want decent returns from the market, then stock trading is the ideal route for you. Beginners should trade under the guidance of an experienced Options trader.
8. Components of Option Trading
The five components of an option contract:
9. Steps To Trade Options in Australia For Beginners
Follow the below steps to learn and start options trading in Australia:
Step 1: Open An Options Trading Account
Compare different options trading brokers on a range of factors, such as:
ASIC Regulated or not
Fees
Credibility
Types of markets served
Platforms supported
Speed
Convenience, Ease of Navigation, etc.
Availability of research, trading, and learning tools
Customer Service
Step 2: Understand Options Trading Terminology
Before you start trading in Options, you must be familiar with specific Options trading terminology that includes:
Holders and writers
Premium
Strike price
Expiration date
In the money
Out of the money
At the money
Break-even point
Step 3: Choose An Options Trading Strategy
There are various options trading strategies available to get different results when trading options. Some of the popular ones include:
Buying a call option
Buying a put option
Hedging your investment
Short calls (selling a call)
Spreads
Straddles
Strangles
Step 4: Choose A Market To Trade Options On
Many brokerage firms in Australia let you trade options in Australian stocks and other markets such as EUR, USD, GBP, CHF, etc. Identify which market you want to trade in and learn how those markets perform.
Step 5: Fund Your Account
Before you start trading options, you need to have adequate money in your brokerage account. If you plan to use leverage, you will need sufficient funds to cover potential losses.
Step 6: Research
Extensive research is needed to develop effective trading strategies to realize desired profits. For this, you need to determine the period during which the market is probable to move.
Based on the type of trade you plan to make, you can opt for daily, weekly, monthly, or quarterly options to meet your goals.
Step 6: Place A Trade
Choose the assets in which you want to trade the options, and place a "call" or "put" options trade. The option type you trade will depend on whether you wish to speculate on the falling or rising market. Remember that buying an option is less risky compared to selling an option.
Having decided whether you want to place a sell or a buy trade, the next step is to select the premium (or margin and strike price with which you want to open the trade position).
Step 7: Regularly Monitor Your Position
After opening a position, track the market movement and the potential profit or loss. In the case of "In The Money", you may close it before the expiry date to maximize your gains.
If you are not in profit territory yet, exit your trade to expiry, and lose only the price you paid to open the position.
10. What Are The Best Options Trading Platform In Australia?
Below is the list of the best options trading platforms in Australia:
Plus 500 (Best Overall Options Trading Platform)
Features:
Year of Establishment: 2008
Headquarters: Haifa, Israel
It is regulated by: Australian Securities and Investments Commission, UK's Financial Conduct Authority, CySec, ISA, and MAS authorities.
Minimum Deposit Required: AUD200
Deposit Fee: None
Withdrawal fee: None
Trading Options - CFDs on Shares, Commodities, Forex, and Indices.
Platforms Supported: WebTrader
Inactivity fee: $10 per month after three consecutive months of inactivity
Pros:
Huge base of 22+ million customers
Serves 50+ countries
2800 trading instruments
Great Customer Support
Low trading fee
Listed on the London Stock Exchange
An intuitive and seamless platform that includes a well-designed mobile app
Cons:
Provides a limited product portfolio
You pay an inactivity fee
Average research and educational tools
AVA Trade (Best Low-Brokerage Fees Platform)
Features:
Year of Establishment: 2006
Headquarters: Dublin, Ireland
Regulated by: Australian Securities and Investments Commission, IIROC, FSA, FFAJ, ADGM-FSRA, and BVI
Commission Fee: None
Deposit Fees: None
Trading Platforms Supported: MT4, MT5, AVaTradeGo, ZuluTrade, DupliTrade, Guardian Angel
Inactivity fee: You will pay $50 after three consecutive months of inactivity
Minimum Deposit: $100
Pros:
Globally renowned broker
The strong track record since 2006
Leverage of up to 20:1
Access all major exchanges, including NYSE, & FTSE
Trade Stocks, Indices, Crypto, CFD, and Commodities
Live multilingual client support
World-class learning tools and resources
Supports multiple trading platforms such as Desktop, Web, and Mobile
Numerous trading strategies
No Commission fee or brokerage fee
Cons:
Highly complex navigation
Slow Updates
CMC Markets (Best Platform for Advanced Research Tools)
Features:
Year of Establishment: 1989
Headquarters: London
Regulated by: ASIC
Monthly Fee: None
Inactivity fee: You pay $15 per month after 12 consecutive months of inactivity
Trading platform: MT4, Stockbroking Standard and Pro platform, Next Generation trading platform, CMCMarkets Mobile Trading App
Options trading fee: $33 up to $10,000, 0.33% above $10,000
Standard brokerage fee: for ASX shares, AU$ 11 or 0.1% for the first ten trades up to AUD 10,000
Membership Options- Classic, Active Investor, and Premium Trader
Pros:
Tailored training for new and experienced traders
Create a diverse portfolio using its wide breadth of trading opportunities - share trading investment products, forex, indices, commodities, shares, ETFs, and treasuries
Competitive Brokerage Rates
Trades at lightning speed
Easy configuration, setup, and execution of orders
Provides advanced charting with 12 chart types, 80+ overlaps/indicators, and 35 drawing tools
Cons:
High stock brokerage and CFD fees
Fast trades
Charges inactivity fee
CommSec Options Trading (Best Platform for Stock Trading)
Features:
Year of Establishment: 1995
Headquarters: Sydney
Parent Company: Commonwealth Bank
Regulated by: ASIC and is a member of the Australian Stock Exchange
Monthly Fee- None
Trading platform: It provides a patented CommSecIRESS trading platform for ASX-listed securities and global shares
Options trading fee: For online trading - $34.95 up to $10,000 in premium. For over-the-phone trading - $54.60 up to $10,000 in premium
Standard brokerage fee: $10 for Australian share trades up to $1,000 with a CommSec CDIA account.
Pros:
Provides access to international stock and securities
Entry requirements are minimal
Reputable and trusted brand name in Australia
Easy to use with no inactivity fee
Cons:
Inactivity charged on international account
Devoid of live chat support
If you are outside Australia, even if you happen to be a citizen, you can't be able to use CommSec
IG Markets (Best Platform For Advanced Traders)
Features:
Year of Establishment: 1974
Regulations: Regulated across the globe by Financial Conduct Authority, Australian Securities Investment Commission, and the Federal Financial Supervisory Authority
Trading Platforms: MetaTrader 4, a proprietary IG trading platform
Options trading fee: Commission is 0.1 unit of market currency for each open/closed contract.
Standard brokerage fee: 8 AUD or 0.1% for each trade, whichever is higher.
Pros:
Has a global client base of over 178000 clients
Numerous global markets, including AUD, USD, EUR, SGD, GBP, and HKD.
Low margin
High leverage
Provides limited-risk trades
Advance chart technology
Ultra-fast and reliable trading platform
Among the safest and low-risk Australian brokers
Great educational tools
An extensive list of tradable products featuring more than 100 forex currency pairs, options, CFDs, commodities, gold, bitcoin, indices, and other cryptocurrencies
Cons:
Charges $18 inactivity fee if inactive for 24 months
Limit product portfolio
Slightly higher fees and spreads on ASX share CFDs and indices than its counterparts
11. Frequently Asked Questions (FAQs)
Can I Profit From Options Trading?
Yes. One of the best benefits of Options Trading is that it can amplify your profits. It is because of the smaller investment price (the premium) compared to buying stocks directly. Let us understand it using an options trading example:
With regular stock trading, suppose you bought 100 stocks at $40, hoping the stock price will rise in the coming days. If the stock price moved in your speculated direction to $45 per stock, you could sell it at a profit.
The difference between the initial investment price of $4,000 and the increase to $4,500 is $500. It is the profit you have made (excluding brokerage costs).
You don't have to pay the full stock price when trading options. You can buy a call option for the same stock at a premium of $1 with a strike price of $40. Since options contracts include 100 stocks, you can buy 40 contracts at $100 each.
Now you hold 4,000 stocks, the same as your investment capital of $4000 from the stock example above. When the stock value rises from your set strike price, such as $40 to $45, the contract premium price also increases. This way, your profits are getting significantly higher through options.
Can I Trade Options on IG Australia?
Yes. IG trading platform provides the facility to trade in options. You will use CFDs to speculate on the option's premium, fluctuating with the likelihood of being lucrative at expiry changes.
Can I Trade Stocks With Options?
Yes. In place of owning the actual stock, you can buy or sell the stock with options at an agreed price on a predetermined future date from its seller. Stock options trading in Australia is popular among traders as they need less initial capital compared to stock trading and have the potential to generate greater profits.
Instead of making a profit by buying or selling stocks, options traders earn profits from fluctuations in the stock price. Besides stocks, investors can trade options on various other assets such as indices, exchange-traded funds, bonds, and commodities.
Can A Beginner Trade-In Options?
Stocks are better suited for beginners and long-term investors, while experienced active short-term investors frequently buy options. These investors have more experience and a strategic, flexible way of investing.
What Is The Best Options Trading Platform In Australia For beginners?
Plus 500 is the ideal share trading app in Australia designed for novice traders. It provides excellent resources that help to enter the trading world, carry out an in-depth market analysis, and access a virtual demo account with $100,000 to practice trading.
Can You Do Options Trading In Australia?
Yes, you can. You can trade options in Australia as exchange-traded options over the Australian Securities Exchange.
The ASX options market began in 1976, with more than 70 different companies, ETFs, and the S&P ASX 200 share price index to choose from.
Investors can buy stock options when trading them on the ASX from major Australian public companies. You can find the list of companies on the ASX website.
Can You Trade Options With CommSec?
Yes. However, to trade in Options, you require the following:
A CommSec Share Trading Account in the same name
A CommSec Margin Loan or CommBank account, or Commonwealth Direct Investment Account that is in the same name for trades settlement
If you don't have any of the above accounts, you will need to open an Options account to perform Options trading using CommSec online trading platform.
Eligibility Criteria to Open an Options Account with CommSec
18 years or older with an Australian residential and postal address
An Australian trust or SMSF
An Australian registered or incorporated company
Should pass the Options Trading assessment
Required Documents
ID proof (passport or driver's licence)
SMSF name and Australian Business Number
Company details and Australian Company Number
Certified copy of the Trust Deed (if necessary)
How Much Does Options Trading Cost?
There are two types of fees for options traders:
The price of the option contract or the premium price.
Broker fees.
While the premium price is the same regardless of the trading platform you choose, the brokerage fee varies from one platform to another. So, consider this fee when deciding on an options trading platform in Australia.
Can I Option Trade With $100?
When considering popular options trading platforms, the minimum deposit fee can be up to $500.
IG: Minimum Deposits: $450
Ava Trade: $100
Plus 500: $100
CMC Markets is the only Australian trading platform that lets you trade options at zero-deposit fees but charges a high brokerage fee compared to other trading platforms.
Can You Buy Options on Westpac?
Yes. Westpac offers the facility to trade exchange options over an underlying share or index listed on the Australian Securities Exchange. To trade options, visit their Share Trading page, and set up a Westpac Share Trading account to trade in Australian shares.
Existing Westpac Share Trading customers can set up an options trading account, sign in to their Westpac Share Trading account, and visit Products & Services > Derivatives > Options to start trading in Options.
Can Australians Use Robinhood?
Robinhood is a US-based financial service that provides a trading app to investors who wish to trade in stocks, ETFs, crypto, and other options. The service started in 2013 with over 5000 domestic and 250 global stocks.
It has become popular as it offers free trade facilities to its investors worldwide. Currently, Robinhood is not available in Australia. Only customers living in the US or the UK can use this platform. Some good alternatives to this service include:
Interactive Brokers
Capital.com
Stake Options
How To Trade US Options In Australia?
You need to find a trading platform that lets you trade in global markets. IG Markets is the best US options trading platform in Australia that serves numerous international markets, including the US.
How To Trade Options on Robinhood?
Download the Robinhood app for iOS/Android and create an account.
Learn the terminologies and working of Options Trading.
Robinhood recommends taking an options trading course and reading option trading books like the Characteristics and Risks of Standardized Options ebook to get the basic knowledge of Options trading before you make your first trade. It is also important because the platform asks a few questions to get approved for trading.
Enable Options Trading. To do this, you need to answer a few verification questions related to Options trading and your current employment status. After reviewing your application, the concerned member of the Robinhood team will contact you if they find you capable of making responsible options trades. Once approved, you can "Enable Options Trading in your Robinhood settings"- Settings > Investing, Options, Enable Options Trading.
Now you are ready to start trading Options With Robinhood with various instruments such as stocks, ETFs, and options commission-free.
12. Conclusion
Trading options is a great investment move for investors to profit from underlying securities. The potential for higher returns, protection from losses, and the advantage of flexibility make it a fantastic alternative trading strategy in a fluctuating market.
We hope the above information has helped you understand Options trading and the best options trading platforms in Australia to start making profitable trades.
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