Exchange Options Plus
Exchange Options Plus is an additional feature of the Leveraged Equities Margin Loan, allowing for the use of exchange traded options (ETO's).
What is Exchange Options Plus?
Exchange Options Plus allows for the combination of option trading and margin lending by establishing a designated options account with your broker. You can access the available funds in your Leveraged Equities Margin Loan to settle option purchases or to meet margin requirements for certain option positions.
You can also purchase protection for your leveraged portfolio and borrow up to 100% of the put option exercise price, where the underlying securities are held.
Typically, Exchange Options Plus is suitable for investors who already own listed securities through a margin loan and:
- want to protect them against a short-term fall in their prices and reduce the chances of a margin call; or
- want to earn additional income and potentially offset interest costs by writing call options.
This feature is also suitable for investors who want to use the equity within their margin loan to fund the settlement of call options purchased through their designated broker.
Benefits & Risks
It is important to be aware of both the benefits and risks associated with a margin loan and the use of exchange traded options. More information is detailed in the Margin Loan and Exchange Options Plus Product Guides.
Benefits
- Protect your securities from a potential drop in price : by purchasing a put option to allow you to sell the underlying securities at a predetermined exercise price.
- Increase the amount you have available to invest : by purchasing a put option to allow you to borrow up to 100% of the exercise price.
- Earn additional income from the securities you hold : by writing covered call options against securities that you own.
- Buy call options using the available funds on your Margin Loan Facility : at a predetermined exercise price on or before a predetermined exercise date.
Risks
- Put option expiry : due to combining a put option with securities held increasing the amount available to invest.
- Net proceeds may not cover the amount owning: because you can borrow up to 100% of the exercise price of the put option when purchasing put options.
- Call option premium will vary : in line with the volatility and price of the securities and other factors.
- Call premium may not outweigh capital loss : should your securities fall in value or the interest costs on your margin loan increase.
- Call premium may not outweigh forgone capital gain : in the event your securities appreciate in value above the call option exercise price.
- Written call options may be exercised at any time : which if assigned could require you to sell the underlying securities at the exercise price.
- Combining options with a Margin Loan Facility may be more complex : it is strongly recommended that financial advice, including taxation advice, is sought before applying.
Case Study
The below case study is based on covered calls. Other case studies, including one for put protection, can be found in the Exchange Options Plus Product Guide.
Assumptions
You hold 2,000 shares in Company B, as secured property under your Margin Loan Facility, that you purchased for $10.00 per share and they are now worth $12.00.You decide you would be happy to sell your shares if the market price moved to $13.00. You could write a call option with an exercise price of $13.00, and with an expiry date 2 months from the purchase date, and receive a 32 cent premium for each option.
If the market price remains below $13.00 at the expiry date, you would most likely retain your shares in Company B whilst keeping the $640 (2,000 shares x 32 cents) premium that you had already received. You could then sell a further covered call option and collect the option premium until the call option is exercised (or when you wish to discontinue this strategy).
If the market price is greater than or equal to $13.00 by the call option expiry date, you may be required to sell your shares for $13.00 each. This would produce a $3.00 capital gain on the sale of your shares ($6,000 total capital gain before tax), in addition to the $640 premium that you earned for writing the call options (less any commission and brokerage).
EXAMPLE (assumes price of Share B is $14)
| Market Price | LVR | Market Price x LVR | Lending Value | |
|---|---|---|---|---|
| Share B | $14.00 | 75% | 10.50 | 10.50 |
| Share B Call Option (exercise price $13) | $1.00 (intrinsic value) | -75% | -0.75 | -0.75 |
| Net Result | 9.75 |
Download
Ensure you download the Margin Loan Product Guide, Exchange Options Plus Product Guide and Master Deed of Priority for more information. Read each part of the terms and conditions and Application Forms for both products and obtain appropriate advice before applying.
- Download a copy of the Leveraged Equities Margin Loan Product Guide
- Download a copy of the Leveraged Equities Exchange Options Plus Product Guide
- Download a copy of the Master Deed of Priority
How to Apply
You and any Guarantor must read the Product Guide in its entirety before applying for a Margin Loan.
You can apply for Exchange Options Plus as:
- an individual or two individuals;
- a company; or
- trustee of a trust (where the trustee is either a company or individuals).
Refer to the checklist when completing the Application Form and return completed and signed forms to your nominated Financial Adviser or Broker. Alternatively, return forms directly to us. Contact details can be found on the Contact Us page.
