Options Basics
An option is a contract that gives the buyer the right but not the obligation to buy or sell an underlying asset at a fixed strike price on or before the expiry date . The buyer pays a premium to the writer (seller), who takes on the matching obligation. Calls grant the right to buy, puts grant the right to sell. Globally, listed equity option volume hit a record 12.16 billion contracts in 2024, with the ASX listing options on around 70 leading Australian companies plus index options on the S&P/ASX 200.
Why it matters
An option is conditional insurance that you actively choose whether to use. You pay a fixed premium today for a future right. If the right is worth using at expiry, you exercise. If it is worthless, you walk away and lose only the premium. The buyer's maximum loss is capped at the premium, while the writer collects that premium upfront in exchange for accepting a one-sided risk. This asymmetry is what makes options different from futures, where both sides face symmetric obligations.
Formulas
Worked examples
You buy an ASX call option on BHP with strike 45, premium 2, expiring in 3 months. Contract size on ASX equity options is 100 shares.
Total cost paid is 200. If BHP rises to 50 at expiry, payoff per share 5= 5 - 2 = $3300 total. If BHP stays below $45, the call expires worthless. The $200 premium is the total loss.
You write (sell) the same call as above, collecting $200 in premium.
Your maximum profit is the $200 premium, achieved if BHP closes at or below $45. If BHP rises to $50, you owe $5 per share, so net result 3$ per share. Your loss is uncapped because there is no ceiling on how high can climb. This asymmetry between buyer and writer drives margin requirements for option writers on ASX Clear.
Common mistakes
- āOptions are always risky. For the buyer, maximum loss equals the premium paid. It is the writer of an uncovered call who faces unlimited risk, not the option buyer.
- āBuying an option means you must exercise it. You can sell the option in the market at any time before expiry. Most listed options that finish in the money are closed out by trading, not by physical exercise.
- āOptions only exist on stocks. ASX lists options on single stocks, the S&P/ASX 200 index (XJO), and exchange-traded funds. Globally, options also trade on currencies, interest rates, commodities, and futures.
Revision bullets
- ā¢Right not obligation for the buyer of an option
- ā¢Call is right to buy. Put is right to sell
- ā¢Buyer pays premium to the writer upfront
- ā¢Writer accepts obligation if buyer exercises
- ā¢Buyer's max loss is the premium. Writer's loss can be unlimited
- ā¢ASX equity contract size is 100 shares per option
Quick check
The maximum loss for a long call buyer is:
On the ASX, a single equity option contract typically covers:
Connected topics
In learning paths
Sources
- Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.Chapter 10 introduces option mechanics, contract specifications, and the basic call and put payoff functions.
- Australian Securities Exchange. Types of Options. ASX Investor Education, accessed 2026.Primary local reference for ASX-listed equity and index options, including contract size of 100 shares and the distinction between American-style equity options and European-style index options.
- Cboe Global Markets. Options Trading Glossary. Cboe Options Institute, accessed 2026.Authoritative US definitions of call, put, premium, strike, and exercise mechanics for listed options.
- Futures Industry Association. Annual Volume Survey 2024: Global Futures and Options Volume. FIA, January 2025.Confirms the record 12.16 billion equity option contracts traded globally in 2024, establishing options as the largest exchange-traded derivatives category by volume.