Options Trading on Australian Shares

The announcement of the disappointing figures regarding China’s GDP growth for Q1 2012, showing its slowest growth for three years, had a negative impact on share prices for Australia’s biggest companies.

Amongst the greatest effected were mining companies. Gold miner Newcrest Mining had its share price fall 2.7%, while Rio Tinto saw its value fall 1.15%.

With China and Australia sharing a trade pact worth in excess of A$105 billion and with mining being one of Australia’s most lucrative exports, the news may not have come as a surprise to some economists. This was later compounded by the continuing fears in the Europe, another of Australia’s key export avenues, as Spanish 10-year yields settled at their highest rate since December 2011 at 5.97%.

While some traders may have waited for the outcome of China’s announcement before taking a position on the underlying markets, others may have done so before it was made. One of the ways this can be achieved is through options trading.

It was likely that China’s GDP announcement would have produced volatility in the market even if its growth accelerated, due to its global economic importance. With options trading, you can take a position on any impending volatility in the market without having to predict which way it will move. This is achieved by buying both a put and call option.

Placing both a put and call option will result in a ‘straddle’; which is simply the combination of the two premiums paid for the put and call options. As an example, your straddle for Rio Tinto comes to 25 points. This means that you would need the share price of Rio Tinto to move 25 points in either direction before you break even, with any point past that resulting in profit per point. If the share price of Rio Tinto remained the same at the time the contract was closed, your loss would be the straddle multiplied by the stake. In this example, if using a stake of A$10 per point, your loss would be strictly limited to A$250.

With IG Markets, you can apply options trading to a range of underlying markets, such as stock indices, commodities and forex. Not all options trading is limited risk and so it is important to know as much about the trade as possible, in terms of both the contract and what might affect the outcome. IG Markets provides a clear breakdown of your potential contract, along with free online seminars and daily market news to help inform you about the financial markets.

Please consider the Product Disclosure Statement available from IG Markets. This information does not constitute as financial advice. CFD and options trading can result in losses that exceed your initial deposit. You do not own or have any interest in the underlying asset.

Author's Bio: 

James Paxton is a financial writer with a passion for options trading. He also has experiences in writing about CFD trading and its applications to a variety of financial markets, including shares, stocks, forex, commodities, bonds and more.