Company Options and Exchange Traded Options, what’s the difference ?
What are company options?
Company options are options issued by a company over unissued shares. They will have an exercise price, and an expiry date – eg XYZ 25c expiring on June 30 2002, and are listed on the ASX until that date.
Provided the share price at the time of expiry is above the exercise price, the option holders will exercise their option by paying the exercise price and be issued with a new share in the company, which will then rank equally with other ordinary shares.
Company options are a method by which companies can raise additional capital at some future point in time (the expiry date), but this is not guaranteed as it is subject to the share price being above the option exercise price at that time. Company options are also used as employee incentives and may be tied to performance, but these are not listed on the ASX.
What are Exchange Traded Options?
Exchange Traded Options (ETO's) are a derivative product issued over existing shares, with each option being for a parcel of 1,000 shares in the underlying companies shares.
There are two kinds of Exchange Traded Options's:
Call options: Giving the buyer the right to buy shares at a specific time and price, and;
Put options: Giving the buyer the right to sell shares in the company.
All ETO's will have a Strike Price, and an Expiry Date, and there will be a range of each series for each share. They are generally only issued over large cap stocks with good liquidity.
The seller (often known as the Writer) of the both Put and Call options has the OBLIGATION – to sell in the case of a Call option, or to buy in the case of the Put option, and investors should realise the risks associated with ETO's, especially if selling options.
Options can be used by investors in a number of ways, including reducing the risk on a portfolio, increasing leverage, for income, or just for trading. ETO's can provide benefits in both a rising or falling market.
In any event you should consult your broker, and they should provide you with a detailed explanation of the ETO market before you trade, Both Company Options and Exchange Traded Options provide investors with leverage to the upside of a companies share price due to their lower price, with Company Options potentially have a greater risk in the case of the share price falling, and do not receive entitlements for dividends.