Index ETOs for someone clueless

[vestanpance]

Hello all,

I thought I'd have a go at a long put using an index based exchange traded option (e.g. XJO). I have no idea what I'm doing really, but thought that this would be the least risk being cash settled.

Could someone give me the basics of how this would work? I don't think I need to know about the ins and outs of options (Greeks etc.?), but am just interested in taking a bearish position on the ASX. Is an index ETO the way to go in this case?

As an example, it doesn't matter what put option I choose on CommSec, if I buy 1 contract for $1 then it costs $1000. I thought the contract size was $10, so where does the 100x multiplication come from?

Also, am I right in thinking that a long put is worth $10 for each index point below the strike price at the expiration date? Is there (more) money to be made before the expiration date, or, if the index is going the right way, is it better to hold on?

I'm feeling a bit thick, as you can imagine.

 

[wayneL]

You really should at least get a basic grasp of options pricing, volatility and the greeks before trading options, this is how you measure your risks, and your potential reward.

The multiplier for XJO options is $10, but a $1 index option? It must be be waaaaaaaay out of the money.

Perhaps if you tell us what the ticker is for the option and someone can have a look for you.

 

[cutz]

As an example, it doesn't matter what put option I choose on CommSec, if I buy 1 contract for $1 then it costs $1000. I thought the contract size was $10, so where does the 100x multiplication come from?

Hi vestanpance,

Just to answer your comsec question, $1 quoted on an XJO option on the comsec website has a contract value of $1000, ( $1 by 1000 ).

If you are using a platform like webiress that same contract will be quoted at 100 points, you then apply the multiplier of 10 to come up with $1000.

Hope i'm making sense, what i'm getting at is the website does not quote the XJO options as per the contract specs, you need to multiply by 1000.

 

[vestanpance]

You really should at least get a basic grasp of options pricing, volatility and the greeks before trading options, this is how you measure your risks, and your potential reward.

OK, I'll get myself an education. I'm sure you're right regarding this. I've seen a few posts here which should help. Can you recommend anywhere else to pick up some knowledge?

The multiplier for XJO options is $10, but a $1 index option? It must be be waaaaaaaay out of the money.

This was just to get an idea of how CommSec priced their options. As cutz replied, the CommSec website doesn't quote as per the contract specs. Nice and confusing for a beginner!