Options Trading in New Zealand
Options are a pop derivative contract traders utilise to speculate on fiscal markets. Options trading is incredibly popular in the United States, but how popular is it in New Zealand? This guide explores the options trading manufacture in New Zealand.
Updated 3 November 2021
An options contract is a derivative allowing traders to speculate on the toll of a security, such every bit shares, or a article, like oil or gold.
The instrument’s proper name “options” refers to the notion that the trader has the pick to practice the contract, meaning they receive physical delivery of the underlying nugget or take the settlement in greenbacks, supposing the strike cost is more favourable than the market price when their contract expires.
Options contracts are very unlike to other derivatives, such as contracts for deviation or futures contracts, considering they accept unique characteristics. Options contracts are oft compared to insurance policies, as yous pay a premium to secure a sure cost in the future. If the cost condition is not met, the contract expires and becomes worthless; if the condition is met, the counterparty that sold the contract pays out. For example, the cost of an options contract depends on various factors, such as the contract duration, the underlying asset’s cost, the strike cost and the premium.
This options trading in New Zealand guide will introduce you lot to the concept of options contracts, how to trade options and where to merchandise options in New Zealand. Our Options Terminology guide is useful reading if you’re unfamiliar with key terms referred to throughout this guide.
- The instrument’southward name “options” refers to the notion that the trader has the option to receive commitment of the underlying asset or receive the settlement in cash.
- Options are contracts that give the buyer the correct, merely not the obligation, to buy or sell an underlying financial musical instrument at a specified price on or before a specified date.
- Options are typically exchange-traded derivatives traded in a regulated marketplace and cleared by an independent clearinghouse, ensuring buyers and sellers uphold their obligations.
- Options can exist used to trade any financial marketplace, such as stocks, indices, bonds, ETFs, commodities and other avails. The nearly common use instance for options contracts is to trade stocks.
- From New Zealand, you can merchandise futures with Tiger Brokers, Interactive Brokers, Jarden and others.
- The value of an options contract is non based solely on the underlying asset; that’southward why brokers like Plus500 and IG Markets offer trading CFDs on options.
- Most options markets are located in the United States; information technology can exist quite inconvenient for New Zealanders to merchandise during the nigh liquid hours because of the time zone difference.
Know this get-go: Risks of trading options
Options contracts are circuitous.
Without thoroughly understanding the characteristics of options contracts, you take chances overpaying options premiums and ultimately losing money.
Buying options contracts deport limited risk.
However, selling options contracts has a
potentially unlimited downside, which is another reason to ensure you fully understand the characteristics of options contracts.
This guide is not exhaustive, and you lot should
undertake substantial research and practising before thinking about trading options.
Our guide covers:
- Introduction to options contracts
- Options contracts comparison with insurance contracts
- Options terminology
- Options exchanges
- Where to trade options in New Zealand
- Often Asked Questions
Introduction to options contracts
Options contracts are derivatives, a financial instrument that lets traders speculate on financial markets without really buying, selling or owning the underlying nugget. Options contracts have several unique characteristics and, in many ways, function like an insurance policy that protects traders from price fluctuations or changes in availability.
Options contracts have been used for centuries. Earlier modern financial markets existed, options were used in the agriculture sector to secure the rights to sure land, crops, produce or tools, without existence obligated to buy the underlying product.
The first reputed use of an options-style contract occurred in ancient Greece by mathematician and philosopher Thales of Miletus; the anecdote lays a good foundation for understanding the office of options. He predicted that an olive harvest would be larger than usual during the off-flavor, so he acquired the right to use many olive presses for the post-obit spring. When spring arrived, and the olive harvest was indeed larger than expected, he exercised the option, and he sub-leased the presses at a much college cost than originally agreed during the off-season.
Options contracts are used in various sectors, such as agriculture, existent estate, energy, mining and financial markets. In the 21st century, the most common use of options contracts is trading equities, i.east. stocks.
Dislocated by the terms used above?
Our Options Terminology explains what you need to know if you’re unfamiliar with cardinal terms.
Options contracts comparison with insurance contracts
The reason options contracts are compared to insurance policies is the way they’re structured. Every options contract involves two parties, the heir-apparent and the seller. The seller is essentially the underwriter taking a bet that the contract will expire worthless, allowing them to continue the premium merely like an insurance company bets yous won’t have an accident.
The value of the underlying nugget is only office of the equation computing the premium of an options contract, but like how a automobile insurance policy isn’t priced solely on the value of the automobile. Options contracts consider the likelihood of the contract expiring in-the-money, just like an insurance policy considers the likelihood of an insurable outcome taking place.
The variables used to determine an options contract premium are the distance between the current cost and the strike price, the duration of the contract and the volatility of the underlying asset.
If an options contract expires
out-of-the-coin, the contract becomes worthless, and the contract seller keeps the premium; this is similar to how an insurance company keeps the premium, supposing you don’t brand a claim. However, if the contract expires
in-the-money, the contract seller must pay out the departure between the strike price and the market price; similarly, if you take a automobile accident, the insurance company is obligated to pay out the departure between the excess and the value of the accident.
Options contracts can be exercised at any point before they expire; the buyer of the choice doesn’t have to wait for the expiration date. Similarly, you lot can submit a claim to your insurance company at any time.
The options buyer risks the premium but has potentially unlimited gains. In contrast, the options seller keeps the premium, supposing the heir-apparent loses but has potentially unlimited losses if the buyer wins.
Confused past the terms used above?
Our Options Terminology explains what you demand to know if you lot’re unfamiliar with key terms.
Important – Options Terminology
Options contracts are structured very differently from other derivatives, such every bit CFDs and futures contracts. To understand how options contracts work, yous should offset sympathize the post-obit characteristics of options contracts.
Other licensed market operators in New Zealand are ICE Futures U.S., Inc, Ice Futures Europe and Australian Securities Substitution Limited. These companies are licensed to distribute their existing overseas markets to participants who may provide the products to New Zealand investors or traders. For example, Interactive Brokers is registered as a participant with ASX, ICE Europe and Ice U.S.
The strike cost is the price the options contract buyer and seller agree to buy or sell the underlying asset in the time to come. The strike price has standardised intervals that vary by underlying product and determined exchange rules. Here are some strike cost examples for dissimilar options contracts:
- Amazon, with a current price of United states of america$3,335.55, has a United states of america$5.00 interval between strike prices. The option chain contains the following strike prices: 3,330.00, 3,335.00, 3,340.00, 3,345.00, 3,345.00, etc.
- Apple, with a current price of U.s.$148.69, has a US$one.00 interval between strike prices up to $150, then the interval increases to US$2.l. The option chain contains the post-obit strike prices: 146.00, 147.00, 149.00, 150.00, 152.fifty, 155.00, 157.50, etc.
- Gilt, with a current price of United states of america$1796.30, has a The states$5.00 interval betwixt strike prices. The choice chain contains the following strike prices: 1,790.00, 1,795.00, 1,800.00, i,805.00, 1,810.00, etc.
- Spark New Zealand, with a current toll of NZ$4.55, has a NZ$0.fifty interval between strike prices. The pick concatenation contains the following strike prices: three.50, iv.00, 4.50, 5.00, 5.50, half-dozen.00, etc.
The options buyer is not obligated to buy or sell the underlying asset when the contract expires. Therefore, if the trader bought a phone call option and the strike toll is higher than the market price, information technology doesn’t brand sense for them to pay more than than the market place price for the underlying asset, allowing the contract to expire worthless and lose the premium they paid. If the buyer truly wants to ain the underlying asset, they tin can buy it cheaper from the market place.
Options way (practice style)
At that place are several styles of options contracts. The nigh common fashion, which is described in this guide, is American options. Other styles are European, Asian, Barrier, Exotic and Binary options. American options are probably the easiest to sympathise and near flexible to operate.
With American-fashion options contracts, buyers tin can exercise the contract at any time on or before the expiration date, providing the market is open. In contrast, traders can only exercise European-style options on the expiry appointment.
Underlying asset or instrument
Every options contract features an underlying asset or musical instrument, which is the subject of the contract and one of the principles determining the options price. An underlying asset could be AAPL shares, and an underlying instrument could be a Aureate November 2021 (GCX1) futures contract. Options futures give the buyer the right to buy or sell a derivative, significant they are derivatives of derivatives.
Options can be used for any asset or musical instrument, for example, stocks, futures contracts, real estate, or even olive presses.
Every options contract has a buyer and seller. In options trading, the terms buy and sell are not related to whether you expect the underlying asset’s cost to rise or fall, as with other investment products. Buying and selling refer to whether you’re buying the contract or selling the contract.
Unremarkably, the counterparty selling or issuing derivatives is a broker. Considering options contracts are typically traded on exchanges, anyone can sell options, also considered writing an options contract.
Anyone selling options contracts must be prepared to deliver the underlying asset when the contract is exercised. If the seller does not own the asset, they are obligated to purchase it at the electric current market cost in the open up market. Because selling options essentially has unlimited risk, it’s typically simply practised past professional trading firms rather than the average MoneyHub reader. The most common way to merchandise options is to purchase contracts, which offers express and controlled chance with potentially unlimited upside.
A call option gives the buyer the right to purchase the underlying asset from the seller at the previously agreed price (the strike price) on or before the expiration date. Conversely, a put pick gives the heir-apparent the correct to sell the underlying nugget to the seller at the strike cost, on or earlier the expiration engagement. You would use a phone call option if you lot expect the underlying asset’due south price to ascension, whereas a put selection would be used if you expect the price to autumn.
The expiration date is the agreed-upon date when an options contract expires. Traders buying options pay a premium for the right to secure a cost for an underlying asset in the future. One of the factors influencing the premium value is the duration of the contract. Expiry dates vary depending on the underlying nugget. For example, stock options expire on Fridays, whereas options on other instruments like oil or gilt futures elapse a few days earlier the underlying futures contract expires.
Options prices are quoted past the buyers and sellers participating in an options substitution. Several factors decide the price people are willing to pay to buy or sell contracts. In general, the cost increases based on the higher likelihood the contract will be exercised in-the-money. The further the expiry date, the closer the strike price is to the market price and the volatility of the underlying asset impacts the toll of an option contract.
Options prices are expressed per unit of measurement, for instance, per share, ounce, barrel or euro. However, options contracts take gear up lot sizes, besides known as the multiplier. For case, U.s.a. stock options are traded in contracts of 100 shares, UK stock options are traded in contracts of ane,000 shares, aureate futures options are 100 ounces, oil futures options are one,000 barrels, and EUR/USD futures options are 125,000 euros.
Traders buying options contracts pay a premium to the seller who is on the other side of their contract and liable for all the gamble. The only risk assumed by the buyer is the premium they pay the seller. The premium is calculated by multiplying the price by the contract size. For example, if the toll for an Apple call option with a $145 strike price expiring on 12-eleven-2021 (AAPL/12X21C145) is 5.55, the premium would be $555.
Options are typically, simply not exclusively, traded on exchanges. In most cases, when someone refers to options, they refer to exchange-traded options, as well known equally listed options. In this guide, nosotros’re referring to
Options are oftentimes traded on specialised derivatives exchanges alongside other products similar futures. For instance, Apple (NASDAQ: AAPL) shares are traded on the NASDAQ stock substitution, yet Apple options ( are traded on CBOE Futures Exchange. Similarly, Purple Mail (LON: RMG) shares, traded on the London Stock Exchange. Yet, Royal Mail options contracts are traded on Intercontinental Substitution.
Where to merchandise options in New Zealand
Options are traded on regulated options exchanges, such as the Chicago Board Options Substitution (CBOE), Bats Global Markets (BATS) or NYSE American (AMEX). Only large financial institutions can merchandise straight on an exchange, therefore to admission an options market, y’all need to trade through a broker with membership to an commutation. Non every broker is a member of every commutation, so yous should consider what products you lot want to trade before deciding on a banker.
Options trading is not equally popular as other investment products in New Zealand, such equally stock trading or CFD trading. Therefore, only a handful of brokers are bachelor for New Zealanders to merchandise options.
Interactive Brokers is a flagship brand in the online trading and investing community. It is an international banker licensed in numerous jurisdictions, providing access to dozens of instruments and thousands of products. Interactive Brokers supports over 30 options exchanges across North America, Europe and Asia-Pacific.
Tiger Brokers (NZ)
Tiger Brokers (NZ) is one of the largest online brokers amongst the Chinese trading community and gaining popularity worldwide. The company provides access to U.s., Hong Kong, Chinese, Singaporean and Australian markets and supports stocks & ETF trading, futures, options and warrants. With Tiger Brokers, y’all can trade US and Hong Kong stock options.
Plus500 is an international CFD broker headquartered in Israel and listed on the London Stock Substitution (LON: PLUS). The visitor is licensed in several jurisdictions, including the Great britain, Commonwealth of australia, Cyprus, Singapore, Seychelles, and New Zealand. Amidst the numerous markets that Plus500 offers on its platform, the visitor provides CFDs on options.
IG Markets is a global online trading brand founded in 1974. The company is listed on the London Stock Exchange (LON: IGG) and is licensed in several regions. IG Markets offers its services to New Zealand from Australia; however, information technology is a licensed Derivatives Issuer authorised past the FMA. Among the thousands of CFD instruments that IG Markets offers, you lot can trade CFDs on options.
Frequently Asked Questions
Are options and binary options the same?
On the surface, it looks like binary options are similar to traditional exchange-traded options, but they are very different.
- Binary options have very curt expiration dates, typically betwixt 60 seconds and 5 minutes. Commutation-traded options have longer expiries, anywhere from one twenty-four hour period to several months.
- Binary options are an over the counter product, meaning the counterparty is the binary options provider. Real options are traded on regulated exchanges betwixt market place participants.
- Binary options accept limited profitability, whereas buying existent options has unlimited profitability.
Is in that location an options commutation in New Zealand?
Yes. The New Zealand Exchange operates an options market. The NZX lists several dairy options and a few other equities and index products:
- Whole milk powder (WMP)
- Skim milk pulverization (SMP)
- Milk Price (MKP)
- Spark New Zealand (NZX: SPK)
- Fletcher Edifice Limited (NZX: FBU)
Due to the express instruments listed, few brokers offer admission derivatives listed on NZX. Simply investment firms catering to institutional and high net worth clients participate in the NZX derivatives market.
Do I need to own stocks to merchandise options?
No. While options contracts tin can be useful for hedging your stocks and protecting them from volatility, you don’t need to own shares to buy put options. Options are a popular musical instrument for speculating on financial markets without owning the underlying nugget.
Do options have limited run a risk?
Options are often touted equally having limited chance; this is just true if you buy options contracts. Buying and selling options are not related to going long or short or expecting the underlying asset price to rise or fall. Y’all can buy put options contracts if you look the price to fall, and yous can purchase call options contracts if y’all expect the price to rise. When you buy an options contract, you lot pay a premium, and that is your entire gamble.
If you sell an options contract, you earn the premium; if the heir-apparent’due south contract closes out-of-the-money, the seller keeps the premium as their profit. However, if the buyer is profitable, the seller must settle the divergence betwixt the strike toll and marketplace price; this can potentially be an unlimited loss.
In summary, buying options has express risk; selling options has unlimited risk.
What is an option chain?
An choice chain is a table showing quotes for the various options contracts for a given underlying asset. Because listed options are traded on exchanges, contracts need to be structured for participants to trade them efficiently. Each contract has an intrinsic value that is determined by multiple factors besides the underlying price. Therefore, there are numerous instruments for every underlying asset for each expiry date.
For example, at the time of writing, a Microsoft put option contract expiring on the 5th of November 2021 with a strike cost of 310 is worth 5.lxxx but a put option with a strike toll of 285 is worth 0.65. Each contract is considered a different musical instrument, each with bid and ask prices, volume and open up involvement. Below is a screenshot of the Microsoft selection chain highlighting the independent pricing characteristics of each contract.
Image from SaxoTrader
Hither are some examples of options contracts from the Microsoft selection chain:
How can I learn more about options trading?