EXCHANGE TRADED OPTIONS PRODUCT DISCLOSURE STATEMENT (PDS) 11 JULY 2014 CONTENTS

Transcription

EXCHANGE TRADED OPTIONS
PRODUCT DISCLOSURE STATEMENT (PDS)
11 JULY 2014
CONTENTS
Purpose of a PDS
2
About E TRADE2
Part One: General information
1. What products does this PDS cover?
2. Overview of key risks
3. Introduction to ETOs
3.1 ASX educational booklets
4. How E TRADE deals with your orders
4.1 Trading ETOs through E TRADE4
4.2 How do your orders get executed?
5. What are ETO contracts?
6. How ETOs work
6.1Contracts
6.2Premium
6.3 Factors affecting option premium
6.4 Time value
6.5Dividends
6
6.6Entitlements
6
6.7 Opening an option position
6
6.8 Closing out of option contracts
6
6.9Expiry
6
6.10Exercise
6
6.11 Automatic exercise
7
6.12Settlement
7
7. Potential benefits of ETOs
7
8. Significant risks of ETOs explained
7
10. Costs and amounts payable associated
with trading exchange traded options
10.1
10
10
Costs
10
10.2 Margins
11. Other significant characteristics of ETO contracts
11.1 Trading and clearing options
11.2 Client trust accounts and collateral
11.3 National guarantee fund
11.4 Additional features
12. Dispute resolution system
13. Taxation implications
13.1 Settlement account
Part Two: Schedule of fees
Costs associated with trading exchange traded options
10
10
11
11
11
11
12
12
13
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9. Worked examples of potential profits and losses
Scenario 1 – Income 1*
Scenario 3 – Speculation 1*
9
Scenario 5 – Hedging 1*
9
9
Scenario 7 – Leverage*
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ETRADE Australia Securities Limited ABN 93 078 174 973, AFSL No. 238277 Retail & Bendigo Version 1
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IMPORTANT INFORMATION
The information in this Product Disclosure Statement (“PDS”) does
not take into account your personal objectives, financial situation
and needs. Before trading in these products referred to in this
PDS you should read this PDS and be satisfied that any trading
you undertake in relation to these products is appropriate in
view of your objectives, financial situation and needs.
While this PDS discusses the benefits of exchange traded
options, you should be aware that there are also significant
risks involved.
We recommend that you consult your financial adviser or
obtain other independent professional advice before trading
in exchange traded options.
PURPOSE OF A PDS
This PDS has been prepared by ETRADE Australia Securities
Limited ABN 93 078 174 973, Australian Financial Services Licence
Number: 238277 (“ETRADE Australia”, “E TRADE”, “we”, “our”
or “us”), the issuer of the exchange traded options. We are
obligated to provide you with this PDS. This PDS is designed to
assist you in deciding whether the products covered in this PDS
are appropriate for your needs. This PDS has been prepared to
assist you in comparing this product with others you may be
considering. Nothing in this PDS is to be construed as investment
advice and this PDS is not a substitution to you obtaining
professional advice.
This PDS is an important document and we recommend you
contact us should you have any questions arising from the PDS
prior to entering into any transactions with E TRADE.
Information relating to the products that is not materially adverse
may change from time to time. This information may be updated
and made available to you through our Website. A paper copy of
any updated information is available for free upon request.
ABOUT E TRADE
E TRADE is a subsidiary of ETRADE Australia Limited
(ABN 12 003 042 082), a wholly owned subsidiary of Australia and
New Zealand Banking Group Limited (ABN 11 005 357 522) (ANZ).
We are an ASX and Chi-X Australia market participant, a clearing
participant of ASX Clear Pty Limited and a settlement participant
of ASX Settlement Pty Limited. ANZ is an authorised deposit
taking institution (ADI) under the Banking Act 1959 (Cth). We are
not an ADI and our obligations do not represent deposits or other
liabilities of ANZ. ANZ does not stand behind or guarantee us.
If you have any questions in relation to this PDS, please contact us:
Address: 242 Pitt Street, Sydney NSW 2000
Post: Reply Paid 1346,
Royal Exchange NSW 1224
Phone: 1300 658 355
Fax: 1300 553 589
Email: [email protected]
Website:www.etrade.com.au
PDS IN TWO PARTS
This PDS is in two parts. The first part contains all information other
than the Schedule of Fees which is contained in the second part.
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PART ONE: GENERAL INFORMATION
Specific concepts which should be understood before
engaging in an options strategy are:
1.What products does this PDS cover?
This is a Product Disclosure Statement for exchange
traded options traded on the Australian Securities
Exchange (“ASX”) and settled and cleared through
the clearing house operated by ASX Clear Pty Ltd
(“ASX Clear”). It deals with equity and index exchange
traded options (“exchange traded options” or “ETOs”).
A list of securities and indices over which exchange traded
options are traded can be found on the ASX website.
2. Overview of key risks
Exchange traded options are high risk investments, which
are only appropriate for experienced investors.
The risk of loss in trading in ETOs can be substantial. Risks
can vary significantly depending on the option traded.
You should only trade exchange traded options if you
understand the nature of the products and the extent of
your exposure to risks. Some of the key risks that apply are:
(a) high levels of leverage are available through ETOs,
which can increase losses;
(b) ETO values erode more quickly as the option
approaches its expiry date;
(c) ETOs can be very volatile investments, as they can
amplify movements in the underlying market. Options
may fall in price or become worthless at or before expiry;
(d) if a bought option expires worthless, you will lose your
total investment in the option;
(e) an option seller may incur unlimited losses if the
market moves against them; and
(f ) under certain conditions, it could become difficult
or impossible to close out an ETO position.
You should carefully read section 8 of this PDS for more
information about some of the risks associated with
investments in ETOs.
3. Introduction to ETOs
ETOs are a versatile financial product which can allow
investors to:
hedge against fluctuations in their underlying security
portfolio;
increase the income earned from their portfolio; and
profit from speculation.
Their flexibility stems from the ability to both buy and
sell an option contract and undertake multiple positions
targeting specific movements in the overall market and
individual securities.
The use of ETOs within an investor’s overall investment
strategy can provide flexibility to take advantage of
rising, falling and sideways markets. However, both the
purchase and sale of exchange traded options involves
significant risks which are discussed in section 8.
the effect time has on any position/strategy, in
particular, ETO values can erode quickly as an option
approaches maturity;
changes in volatility of the underlying security or index
may affect your position and/or strategy;
how to calculate margins and worst-case scenarios for
any position and/or strategy;
the likelihood of early exercise and the most probable
timing of such an event;
the effect of dividends and capital reconstructions on
an option position and/or strategy; and
liquidity of an option series, the role of market makers,
and the effect this may have on your ability to exit a
position and/or strategy.
When buying an ETO the initial outlay of capital may
be small relative to the total contract value so that
transactions are “leveraged” or “geared”. Leverage can
magnify losses. Transactions should only be entered
into by investors who understand the nature and extent
of their rights, obligations and risks associated with
trading exchange traded options.
When selling an ETO the initial income may seem attractive
but the downside may be unlimited. Risk minimisation
strategies should be considered to mitigate losses when a
position does not move in a favourable manner.
Whilst this PDS provides product information including
information about the risks, characteristics and benefits of
ETOs, investors should inform themselves and if necessary
obtain advice about the specific risks, characteristics and
benefits of the exchange traded option they intend to trade.
3.1 ASX educational booklets
The ASX has prepared a number of educational booklets
relating to exchange traded options which are available
on the ASX website.
In addition to reading this PDS, investors are advised that
this PDS cross references certain ASX booklets. The ASX
booklets that relate to options include “Understanding
Options Trading”, “Margins”, and “Option Strategies” and
they are available free of charge on the ASX website.
These booklets provide useful information regarding
options traded on the ASX, including option features,
advantages of options, risks associated with options,
option adjustments, option pricing, margins, taxation and
option contract specifications. One of the ASX booklets
entitled “Understanding Options Trading” is a booklet that
we must give you when you choose to activate to trade
exchange traded options and is also obtainable on the
ASX website.
If you cannot access the ASX booklets via the ASX website,
please contact us immediately and we will arrange to
forward copies of the booklets to you at no charge.
If you have any questions on any aspect of the booklets
you should consult E TRADE before making any
investment decisions.
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4. How E TRADE deals with your orders
4.1 Trading ETOs through E TRADE
Before we will accept orders to trade ETOs on your behalf,
you will need to have entered into a Derivatives Client
Agreement with E TRADE.
4.2 How do your orders get executed?
If we accept your orders, E TRADE will place them into
the ETO market. E TRADE reserves the right to reject any
ETO order received, or refer any such order received to
one of E TRADE’s Designated Trading Representatives
(“DTRs”), for review and determination of which orders will
be placed into the ETO market.
E TRADE offers its clients the ability to place orders in
ETOs either by phone or via the internet. (Orders placed
via phone may incur an additional charge – please refer to
Part two: Schedule of fees.)
5. What are ETO contracts?
ETOs may be American or European style (index ETOs are
European only). Most ASX equity options are American style
which means they can be exercised at any time prior to the
expiry day. European options, which includes index options,
can only be exercised on the expiry day and not before.
An equity exchange traded option is a contract between
two parties which gives the buyer (the taker) the right, but
not the obligation, to buy or sell the securities underlying
the option at a specified price (exercise price) on, or
before, a predetermined date. To acquire this right, the
buyer pays a premium to the seller (writer) of the contract.
Index options give you exposure to a market index, such
as the S&P/ASX 200. They offer similar benefits to options
traded over securities, except they offer exposure to
the broad range of securities that make up an index. As
with equity options, both call and put index options are
available. However, there are a few differences:
either a bought call, a sold call, a bought put, or a sold
put. A long (or bought) option position is created by
the purchase of a call or put. A short (or sold) position
is created by the sale of a call or put. By combining two
or more of these basic positions, an investor can create
a trading strategy that meets a range of investment
objectives, including the protection of an existing
portfolio of securities.
For more information on possible trading strategies we
refer you to the ASX booklet entitled “Options Strategies”
obtainable on the ASX website.
Equity call options give the buyer the right, but not the
obligation, to buy a standard quantity of underlying
securities at a predetermined price on (or in the case of
American style options, before) a predetermined date.
If the buyer exercises their right to buy, the seller is
required to sell a standard quantity of securities at the
predetermined exercise price.
Equity put options give the buyer the right, but not
the obligation to sell a standard quantity of underlying
securities at a predetermined price on (or in the case
of American style options, before) a predetermined
date. If the buyer exercises their right to sell, the seller is
required to buy a standard quantity of securities at the
predetermined exercise price. The premium is the price
of the option contracts agreed to by the buyer and seller
through the market.
The buyer will always pay the seller a price (called the
premium) to enter into the option contract. The seller
receives and keeps the premium but has the obligation to
buy from or deliver to the buyer the underlying securities
at the exercise price if the buyer exercises the option.
6. How ETOs work
This section explains how ETOs work, including:
Contracts;
Premium;
index options can only be exercised on their expiry
date. However, an index option can still be closed out
at any time;
Factors affecting option premium;
Time value;
index options are cash-settled, meaning you will
receive or pay a cash payment on exercise, and the
settlement price is based on the opening price of the
index on the morning of the expiry date; and
Dividends;
Opening an option position;
the strike price and premiums for index options are
expressed in index points, rather than as a cash value.
Closing out of option contracts;
Entitlements;
Expiry;
The premium is not a standardised feature of the
exchange traded option contract and is established
between the buyer and seller at the time of the trade. See
section 6.2 on premium in this PDS for more information.
ETO sellers are often referred to as “writers” because they
underwrite (or willingly accept) the obligation to buy
or sell the securities (or index) covered by an option.
Similarly, buyers are often referred to as “takers” of an
exchange traded option as they take up the right to buy or
sell a parcel of securities (or index). Every exchange traded
option contract has both a buyer and a seller.
There are two types of ETOs, namely call options and put
options. All option positions consist of one or more of
Exercise;
Automatic exercise; and
Settlement.
6.1Contracts
ETOs are created by the exchange on which the
underlying security is quoted, or the securities that are
constituents of the underlying index are quoted. E TRADE
trades exchange traded options in relation to securities
quoted on the ASX, as well as over some indices. The ASX
website provides a list of securities and indices over which
exchange traded options are traded, these can be found
on the ASX website.
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ASX determines the key contract specifications for each
series of exchange traded options listed, including:
(a) the underlying security or underlying index;
(b) the contract size where 1 exchange traded equity
option contract on ASX usually (but not always)
represents 100 underlying securities;
(c) the contract size for index option is $10 for each point;
(d) the exercise price (or strike price) – is the price at which
the buyer of an equity exchange traded option can buy
or sell the underlying securities. The ASX sets the range
of exercise prices at specific intervals according to the
value of the underlying securities. It is important to
note that the exercise price and/or contract size of an
equity exchange traded option may change during the
life of an option, for example if the underlying security
is subject to a bonus or rights issue or other form of
capital reconstruction. As noted above, the exercise
price for index options is expressed in index points;
and
(e) the expiry date – exchange traded options have a
limited pre-determined life span and generally follow
one of three cycles, namely:
(i)January/April/July/October;
(ii) February/May/August/November; or
(iii)March/June/September/December.
The ASX may in accordance with its operating rules make
an adjustment to any of the above specifications, for
example if the listed entity over which the option relates
makes a pro-rata change to its ordinary share capital
structure (eg. if bonus issues or special dividends are
declared). If ASX does make an adjustment it is required to
endeavour to preserve the open positions of buyers and
sellers at the time of the adjustment as best as possible.
The ASX provides further information regarding ASX
option adjustments in an Explanatory Note for Option
Adjustments which can be found on the ASX website.
Full details of all exchange traded options listed on ASX
and expiry date information can be found on the ASX
website or alternatively through information vendors or
newspapers. A list of current option codes and delayed
price information is available on the ASX website. Details
of the previous day’s trading are published in summary
form in the Australian Financial Review and in The
Australian. If you cannot access this information, please
contact us and we will provide you with the information.
Details of contract specifications for exchange traded
options are published by the ASX on their website. The
contract specifications detail key standardised features
of exchange traded options traded on the ASX.
6.2Premium
The premium (price of the option) is not set by the ASX.
It is agreed between the buyer and seller of the exchange
traded option through the market. The premium for an
equity exchange traded option is quoted on a cents per
security basis so the total premium payable is calculated
by multiplying the premium amount by the contract size
(commonly 100).
For example, if you buy a call option with a premium
quoted at 25c per security and a contract size of 100, the
total premium is $25.00 (being $0.25 x 100). The premium
for an index option is calculated by multiplying the
premium by the index multiplier. For example, a premium
of 30 points, with an index multiplier of $10, represents
a total premium cost of $300 per contract.
6.3 Factors affecting option premium
Option premiums will fluctuate during the option’s life
depending on a range of factors including the exercise
price, the price of the underlying securities or the level of
the index, the volatility of the underlying securities or the
underlying index, the time remaining to expiry, interest
rates, dividends and general risks applicable to markets.
For ETOs, market expectations and ultimately, the
pressures of supply and demand will also determine
the value of options.
6.4 Time value
Time value represents the amount an investor is prepared
to pay for the possibility that the market might move in
their favour during the life of the option.
The amount of time value will depend on whether the
option is in-the-money, at-the-money or out-of-themoney. At any given time, the at-the-money option will
have the greatest time value. The further in or out-of-themoney the option is, the less time value it will have.
a call option is said to be in-the-money where the
exercise price is less than the security price (or index
level).
a call option is said to be at-the-money where the
exercise price equals the security price (or index level).
a call option is said to be out-of-the-money where
the exercise price is greater than the security price
(or index level).
a put option is said to be in-the-money where the
exercise price is greater than the security price (or
index level).
a put option is said to be at-the-money where the
exercise price equals the security price (or index level).
a put option is said to be out-of-the-money where the
exercise price is less than the security price (or index level).
An option’s time value is affected by the following factors:
Time to expiry – the longer the time to expiry, the greater
the time value of the option.
Time value declines as the expiry of the option draws
closer. This erosion of time value is called time decay.
It is not constant, but increases rapidly towards expiry.
Volatility – in general, the greater the volatility of the
underlying asset, the greater the time value will be.
This is because the seller is exposed to a greater
probability of incurring a loss, and will require higher
premium income to compensate for the increased risk.
Interest rates – an increase in interest rates will lead
to higher call option premiums and lower put option
premiums, all else being equal.
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This reflects the cost of funding the underlying securities.
The buyer of a call option can defer paying for the
securities until the option’s expiry date, and invest the
funds elsewhere during this period. As interest rates rise,
more interest can be earned on the funds, so the call
option is worth more to the option buyer.
6.8 Closing out of option contracts
An ETO position may be ‘closed out’ by placing an order
equal and opposite in effect to the original order – this
effectively cancels out the open position. An investor
might close out an option contract:
The effect of an interest rate rise is the opposite for put
options, as the buyer is deferring the receipt, rather than
the expenditure, of funds.
6.5Dividends
when there is a risk of unwanted exercise for both
American and European style options;
to take a profit; or
to limit a loss.
If a dividend is payable during the life of an option, the
premium of a call option will be lower, and the premium
of a put option higher, than if no dividend was payable.
E TRADE will automatically treat a buy or sell order in a
particular series as a close out against any opposite series
held.
This is because securities tend to fall in value on going
ex-dividend, all else being equal. Anything that leads to
a lower price may make call options less valuable and put
options more valuable.
Example
In practice, option pricing is complex and involves the use
of mathematical formulae to calculate the intrinsic value
and time value of options.
This is general options information only. For more
information on option pricing, you should refer to the
section entitled “Option pricing fundamentals” in the ASX
booklet “Understanding Options Trading”.
You can obtain current price information on ETOs via our
website. Alternatively, you can contact us on our details
listed in the section entitled “About E TRADE” in this PDS.
6.6Entitlements
Exchange traded options contracts do not entitle investors
to dividends or other entitlements paid by the issuer of
the underlying securities, unless the investor exercises the
option to become the holder of the underlying securities
at or before the relevant date for dividend or entitlement
purposes.
6.7 Opening an option position
The establishment of an exchange traded options contract
is referred to as opening a position. Once the buyer of an
exchange traded option has an open position they have
three alternatives:
If you have bought 10 contracts in Option X, and you
place an order to sell 6 contracts in that same series,
E TRADE will treat that sell order as a partial close out of
your existing Option X bought position, and if that order
is executed, your net bought position in Option X will be
4 contracts.
Closing out can be achieved without reference to the
original party to the trade because of the process of
novation. ASX Clear is able to substitute a new buyer as
the contract party when an existing buyer sells to close
their position. The process of novation is discussed in
more detail below in the section 11.1 entitled “Trading
and clearing options”.
6.9Expiry
ETOs have a limited life span and every option within the
same series, which has not already been exercised, will
expire on the expiry day. The expiry day is a standard day
set by the ASX.
For equity exchange traded options the option usually
expires on the Thursday preceding the last Friday in
the month, as long as both the Thursday and Friday are
business days. Therefore if the last day of the month is
a Thursday the option will likely expire on the Thursday
prior (providing that both Thursday and Friday are
business days).
1. they can exercise the option;
For index exchange traded options, expiry is usually the
third Thursday of the contract month (unless otherwise
specified by the ASX).
2. they can hold the option to expiry and allow it to lapse;
or
Expiry day information is available on the ASX website.
3. they can close out their position by selling an option
in the same series as originally taken.
The seller of an exchange traded option has two
alternatives:
1. they can hold the option to expiry and risk being
exercised against (if it is not exercised against, it will
expire without any further obligation or liability on the
seller); or
2. they can close out their position by buying an option in
the same series as originally taken (provided it has not
already been exercised against).
6.10Exercise
Buyers generally make the decision to exercise an
exchange traded option contract. This means that an
American style equity option seller may be exercised
against at any time prior to expiry. European style options
can only be exercised at expiry.
The ASX will “randomly” allocate a seller to every exercised
bought position. This means that if the buyer wants to
exercise an equity exchange traded option contract and
either buy or sell (depending on whether it is a call or a
put) the securities subject to the contract at the exercise
price then ASX randomly allocates a seller of that option
and allocates the exercise against them.
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The seller must then sell the securities at the exercise price
for a call or buy the securities at the exercise price for a
put. The buyer of an option will generally only exercise for
a profit and therefore the exercise may result in a loss to
the seller of the option, depending on their initial costs.
Once a seller has been allocated, the seller has lost the
opportunity to close out their position and must effect the
delivery or cash settlement obligations for the particular
equity option contract.
7. Potential benefits of ETOs
ETOs can have a number of potential benefits, including:
investors can manage their risk by hedging (protecting)
their portfolio from a drop in value. For example, put
options can allow investors holding securities to hedge
against a fall in the security price;
investors can earn income by selling call options over
securities they already hold. As a seller of options, the
investor will receive the premium amount up front. The
risk is that the seller of a call option may be exercised
against and be required to deliver their securities to the
buyer at the exercise price;
by buying a call option, the purchase price for the
underlying securities is locked in. This gives the
call option holder time to decide whether or not to
exercise the option and buy the securities. The holder
has until the expiry date to make his/her decision.
Likewise the buyer of a put option has time to decide
whether or not to sell their securities;
exchange traded options benefit from standardisation
and registration with a clearing and settlement
facility which reduces counterparty default risk.
This process provides the benefit that the investor’s
position can be closed out without reference to the
original counterparty and the investor’s risk to that
counterparty is transferred to the ASX Clear;
the flexibility of entering or exiting the market prior
to expiry permits an investor to take a view on market
movements and trade accordingly. In addition a variety
of option combinations allows investors to develop
strategies regardless of the direction of the market;
options do not require a rising market to make money,
rather investors can profit from both rising and
falling markets depending on the strategy they have
employed. Strategies may be complex and strategies
will have different levels of risk associated with each
strategy;
the initial outlay for an equity exchange traded options
contract is not as much as investing directly in the
underlying securities. Trading in options can allow
investors to benefit from a change in the price of a
security without having to pay the full price of the
security. An investor can therefore purchase an option
(representing a larger number of underlying securities)
for less outlay and still benefit from a price move in
the underlying securities. The ability to make a higher
return for a smaller initial outlay is called leverage.
Investors however, need to understand that leverage
can also produce increased risks (see significant risks
section below); and
given the lower initial outlay attached to options,
investors can diversify their portfolios and gain a broad
market exposure over a range of securities or an index.
For index exchange traded option contracts which are
European style and therefore can only be exercised on the
expiry date, E TRADE will automatically exercise if the
contract is one point in-the-money.
6.11 Automatic exercise
Unless you or your authorised agent requests us to do
otherwise by no later than 4.30pm Sydney time on the
date of expiry, exchange traded option contracts will be
automatically exercised if your contract is determined by
ASX to be in-the-money (one cent in-the-money for equity
options or one point in-the-money for index options).
For call options the options will be in-the-money where
the exercise price is below the closing price of the
underlying securities.
For put options the option will be in-the-money where the
exercise price is higher than the price of the underlying
securities.
All unexercised option contracts will expire on the expiry
date.
6.12Settlement
Exchange traded options are either deliverable or
cash settled. Most exchange traded equity options are
deliverable, that is they are settled with physical delivery
of the underlying security, whilst index options are cash
settled. Cash settlement occurs in accordance with the
ASX Clear operating rules against the Opening Price Index
Calculation (OPIC) as calculated on the expiry date.
Payment for, and the delivery of underlying securities,
on exercise of an open exchange traded option contract
occurs via the ASX’s Clearing House Electronic Subregister
System (CHESS) on the third business day following
exercise (T+3). E TRADE is obligated to make payment/
delivery to the ASX within this timeframe.
For index options, a cash settlement amount calculated
having regard to the opening price index calculation
on expiry day, is paid to the exercising buyer on the day
following the expiry date. The level used for settling index
options is determined by special formula. If you intend
on investing in index options you should take the time to
understand these arrangements. For more information
on settlement of index exchange traded options see the
ASX booklet “Understanding Options Trading” section on
‘Trading index options’.
E TRADE requires that you settle at T+1 (that is during
the day after the time the trade occurred) for all cash
positions which arise from premiums, interest, and other
cash transactions. You are also required to pay any margin
amounts to us. Please see the discussion on margins in
section 10.2.
8. Significant risks of ETOs explained
The risk of loss in trading in ETOs can be substantial. It is
important that you carefully consider whether trading
ETOs is appropriate for you in light of your needs,
investment objectives and financial circumstances.
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the underlying securities are in trading halt if the
circumstances are appropriate, restrict exercise,
terminate an option position or substitute another
underlying security (or securities), impose position
limits or exercise limits or terminate contracts – all to
ensure fair and orderly markets are maintained as far
as practicable. These actions can affect an investor’s
option positions;
You should only trade ETOs if you understand the nature
of the products and the extent of your exposure to risks.
The risks attached to investing in ETOs will vary in degree
depending on the option traded – see the risks outlined
below.
This PDS does not cover every aspect of risk associated
with ETOs. For further information concerning risks
associated with ETO trading please refer to the ASX
booklet “Understanding Options Trading” and in particular
the section entitled “Risks of option trading” (the booklet
can be found on the ASX website).
(i) the placing of risk minimisation orders may not always
limit an investors' losses to the amounts that are
expected. Market conditions may make it impossible
for a broker to execute the risk minimisation orders.
Strategies using combinations such as ‘spreads’ or
‘straddles’ may be as risky as taking a simple ‘long’ or
‘short’ position;
ETOs are not suitable for some retail investors, for
example, investors who have a low risk tolerance should
not enter into ETO trades which have the potential for
unlimited losses. In deciding whether or not you should
trade exchange traded option contracts, you should be
aware of the following matters relating to risk:
(j) transactions on the ASX may be subject to dispute.
When a transaction is subject to a dispute the ASX
has powers, in accordance with its operating rules, to
request that a broker amend or cancel a trade, which
may in turn result in the contract with the clients being
amended or cancelled;
(a) the high level of leverage that is obtainable in trading
ETOs (due to the low level of initial capital outlay) can
work against an investor as well as for the investor.
Depending on the market movement, the use of
leverage may lead to large losses as well as large gains;
(k)E TRADE has the ability to refuse to accept your order,
or to amend or cancel your order or trade, as stated
in our Terms and Conditions and any Contract Note
issued. This could cause you to suffer loss or increase
your loss; and
(b) ETOs have a limited life span as their value erodes more
quickly as the option approaches its expiry date. It is
therefore important to ensure that the option selected
meets the investors' investment objectives;
(l) transactions on the ASX are executed on an electronic
trading platform and cleared through ASX Clear. As
with all such electronic platforms and systems, they
are subject to failure or temporary disruption. If the
system fails or is interrupted we will have difficulties
in executing all or part of your order according to your
instructions.
(c) ETOs can amplify movements in the underlying market.
Options may fall in price or become worthless at or
before expiry;
(d) the maximum loss in buying an ETO is the amount
of premium paid. If the option expires worthless, the
taker will lose the total value paid for the option (the
premium) plus transaction costs;
(e) whilst the seller of ETOs earn premium income, they
may also incur unlimited losses if the market moves
against the option position. The premium received by
the seller is a fixed amount; however the seller of an
equity call option has increased risk where the price
of the underlying security rises and the seller does
not own the underlying securities. If the call option is
exercised, the seller of the option is forced to buy the
underlying securities at the current (higher) market
price in order to deliver them to the buyer at the
exercise price. Similarly where the market falls, the
seller of an equity put option that is exercised is forced
to buy the underlying securities from the buyer of the
put option at a price above the current market price;
(f ) sellers of ETOs could sustain a total loss of margin
funds deposited with their broker where the market
moves against the option position. In addition, the
seller may be obligated to pay additional margin funds
(which may be substantial) to maintain the option
position or settlement of the contract. Margining is
discussed below;
(g) under certain conditions, it could become difficult or
impossible to close out a position. This can happen
for example where there is a significant change in
the price of the underlying security over a short time
period;
(h) the ASX has discretionary powers in relation to the
market. It has the power to suspend the market
operation, or lift market suspension in options while
9.Worked examples of potential
profits and losses
You are the holder of Security A and you wish to
supplement your dividend income. You decide to sell a
call option.
You hold 1,000 Security A and the current market price
for Security A is $8.72. Your Security A holding is currently
valued at $8,720.00 (1,000 x $8.72).
You sell 10 November Security A call options with an
exercise price of $9.02 and a contract size of 100 securities.
The premium payable to you for the option is $0.98.
The total amount payable to you is $933.62 ($980.00
($0.98 x 100 x 10) – $44.95 brokerage – $1.43 ASX Clear
registration fee).
Unless your Security A holding is held through a CHESS
sponsored account and such securities are not already
being used as margin, you will be required to provide us
margin in connection with your obligations under the call
option, as described in section 10.2 below.
The price of Security A has steadily fallen and at expiry
Security A is trading at $8.47. Although your Security
A holding is now valued at $8,470.00, the call option is
not exercised and you have received $933.62 by way of
premium received for selling the option.
8
At expiry, you have received $933.62 (being your premium
net of brokerage and ASX fees) and retained your Security
A holding which is now valued at $8,470.00.
be trading over $10.00. A November Security A call option
with an exercise price of $9.47 and a contract size of 100
securities is currently offered for a premium of $0.38.
You decide to buy 10 November Security A call options.
You are the holder of Security A and you wish to supplement
your dividend income. You decide to sell a call option.
Amount payable for the November Security A call options
= $380.00 ($0.38 x 100 x 10) + $44.95 brokerage + $1.43
ASX Clear registration fee = $426.38.
You hold 1,000 Security A and the current market price
for Security A is $8.72. Your Security A holding is currently
valued at $8,720.00 (1,000 x $8.72).
You sell 10 November Security A call options with an exercise
price of $9.02 and a contract size of 100 securities. The
premium payable to you for the option is $0.98. The total
amount payable to you is $933.62 ($980.00 ($0.98 x 100 x10)
– $44.95 brokerage – $1.43 ASX Clear registration fee).
In November, the price of Security A has fallen to $8.80.
Your option is worthless and you lose the total premium
paid plus brokerage and ASX fees ($426.38).
You own 1,000 Security A currently trading at $9.47 and
think the price may fall. Selling call options could offset
any short term loss, but you would like to be able to lock
in a sale price for your securities if the market does fall.
You could buy 10 June Security A put options with an
exercise price of $8.98 and a contract size of 100 securities
for a premium of $0.67.
Unless your Security A holding is held through a CHESS
sponsored account and such securities are not already
being used as margin, you will be required to provide us
margin in connection with your obligations under the call
option, as described in section 10.2 below.
The amount payable for the June Security A put options =
$670.00 ($0.67 x 100 x 10) + $44.95 brokerage + $1.43
ASX Clear registration fee = $716.38.
The price of the Security A has steadily risen and at expiry
Security A is trading at $10.52. Although your Security
A holding is now valued at $10,520.00, the call option is
exercised and you are required to sell 1,000 Security A
at $9.02 (for a total of $9020.00).
The price of Security A does fall to $7.97 prior to the
expiry date and you decide to exercise your put option.
In exercising the put option, your total sale proceeds are;
The total amount you receive under the option is
$9,908.12, being $933.62 (total premium received) + the
amount you receive on exercise of the call option, being
$8,974.50 ($9020.00 (for sale of 1000 Security A) – $44.95
brokerage) – $0.55 (ASX Clear assignment fee).
($8.98 x 1,000 – $44.95) – $0.55 = $8,934.50. When the
amount you paid to purchase the put option is deducted,
your net proceeds are $8,218.12. By buying the put option,
you protected yourself and have reduced the impact of
the fall in the share price of Security A by:
This represents a loss of $611.88 relative to what your
Security A holding would have been worth had you not
sold the call option.
$8,934.50 – ($7.97 x 1,000 – $29.95 (being the sale proceeds
you would have received had you sold your Security A
holding without exercising the put) – $716.38 = $278.07.
However, you have still made a loss on your holding of
Security A over the relevant period in the amount of
$1,251.88 ($9.47 x 1,000 (being the value of Security A at
the beginning of the period) – $7.97 x 1,000 (being the
value of Security A prior to the expiry date) – $278.07
(being the protection from the put option) + $29.95
(brokerage for selling Security A)).
You believe that Security A will rise in value in five months
time. In June, Security A is trading at $9.58 and you believe
that at the end of November, Security A will be trading over
$10.00. A November Security A call option with an exercise
price of $9.47 and a contract size of 100 securities is currently
offered for a premium of $0.38.
You decide to buy 10 November Security A call options.
The total amount payable for the November Security A
call options is $426.38 ($380.00 ($0.38 x 100 x 10) + $44.95
brokerage + $1.43 ASX Clear registration fee).
Your profit is $848.17, being the your net sale proceeds
(($10.82 x 1,000 – $29.95) minus the total amount you
paid to buy, and then exercise your option ($9.47 x 1,000
+ $44.95) – $0.55 – $426.38).
You believe that Security A will rise in value considerably
in five months time. In June, Security A is trading at $9.58
and you believe that at the end of November, Security A will
You own 1000 Security A currently trading at $9.47 and
think the price may fall. Selling call options could offset
any short term loss, but you would like to be able to lock
in a sale price for your securities if the market does fall.
You could buy 10 June Security A put options with an
exercise price of $8.98 and a contract size of 100 securities
for a premium of $0.67 ($716.38 = $670.00 ($0.67 x 100 x 10)
+ $44.95 Brokerage + $1.43 ASX Clear Registration Fee).
In November, the price of Security A has risen to $10.82.
You exercise the call option and receive 1,000 Security A
shares for $9.47. You immediately sell the securities at the
market price.
The price of Security A trends sideways and at expiry is
trading at $9.47. Your option is worthless and you lose the
total premium paid of $716.38.
Scenario 7 – Leverage*
Buying call options allows you to profit from an increase in
the price of the underlying securities. Suppose you believe
Security A, currently trading at $5.57, will rise in price
over the next few months. You do not want to pay the full
9
$5,570.00 to buy 1,000 securities so you decide to buy
10 September call options with exercise price of $5.70 for a
premium of $0.40 ($446.38 = $400.00 ($0.40 x 100 x 10)
+ $44.95 Brokerage + $1.43 ASX Clear Registration Fee).
If you are correct and the price of Security A rises then
the value of your option will also rise. You can then sell
an equivalent call option to close out at any time prior to
the expiry day and take your profit. You will not have to
buy Security A if you don’t want to. If the market doesn’t
move as expected, you can either close out the option and
recoup some of your initial investment, or you can simply
let the option expire worthless in September which would
result in a loss of $446.38.
When you buy a call or put option, the most you can
lose is the premium you have paid in the first place, with
brokerage and fees.
*These examples:
assume that all orders are placed online (i.e. no
additional telephone order charges are applied);
assume you are not entitled to any brokerage rebates;
and
plus twice the Final Risk. We reserve the right to change
the margin requirement without prior notice to you. The
latest margin requirement is published on the website.
ASX Clear margin obligations may be met by paying cash or
by providing certain types of eligible collateral (eg. Securities
and bank guarantees). ASX Clear applies a ‘haircut’ in relation
to the value of such collateral as a risk management tool,
eg. ASX Clear generally values collateral held by it at 70% of
its full value. This means that if the securities used by you
as collateral have a market value of $10,000 only $7,000 will
be counted as collateral cover for your margin calls. Cash is
required to cover mark to market margins.
Margin must be paid by you within 24 hours of you being
advised of the margin call by us. The margining process
used by ASX Clear is explained in detail in the ASX booklet
“Margins” which is available on the ASX website.
Any interest levied on late settlement and margin
payments is due and receivable at the time the amount
is levied and certainly within 1 business day of a demand
being made by E TRADE Australia.
Example
Assume:
do not take into consideration the tax implications
of your transactions.
you sold one call option contract with the value of
$609.00; and
10.Costs and amounts payable associated
with trading exchange traded options
10.1Costs
Part Two of this PDS contains information on the
commission, brokerage and exchange fees attaching
to exchange traded options.
10.2Margins
Sellers of options may be obligated to pay us margin. E TRADE
calculates margin based on the prevailing ASX margin
methodology. However, we charge additional amounts
of margin, as described below.
Margins are generally a feature of all exchange traded
derivative products and are designed to protect the
financial security of the market. A margin is the amount
calculated by E TRADE as necessary to cover the risk of
financial loss on an exchange traded options contract due
to an adverse market movement. This means that if the
price of your options moves against you, you will be asked
to pay a margin which represents that adverse movement.
Total margin for exchange traded options is made up of
two components:
Net Option Value – is the net liquidating value for options
positions.
Final Risk – is the potential change in the price of the
option contract assuming the maximum probable interday price move in the price of the underlying security or
index. In times of extreme volatility an intra-day margin
call may be made by ASX Clear and as a consequence, we
may request that you pay this on the same day.
We may call more margin from you, compared to the
amount that it is obligated to be paid to ASX Clear. Our
standard setting for margining clients is Net Option Value
ASX determines the Final Risk amount for that option
contract to be $195.40.
Your margin requirement will be:
Final Risk
$195.40
Plus Net Option Value
$609.00
ASX Clear margin requirement
$804.40
Plus additional E TRADE
margin requirement (Final Risk)
$195.40
Total margin required
$999.80
11.Other significant characteristics of
ETO contracts
There are a number of other significant characteristics of
exchange traded options you should be aware of when
dealing. These include:
Trading and clearing;
Client trust accounts and collateral; and
National Guarantee Fund.
11.1 Trading and clearing options
Exchange traded options are traded on the ASX’s trading
platform and cleared through ASX Clear. Participants of
ASX must comply with the operating rules of the ASX and
the ASIC Market Integrity Rules. Participants who clear
option contracts must comply with the operating rules
of ASX Clear.
E TRADE is an ASX Market and Clear Participant
authorised to execute exchange traded option contracts
on the ASX’s trading platform for such products, and to
clear them through ASX Clear.
10
ASX Clear stands between the buying and selling brokers
(the ASX participants) and guarantees the performance
to each of them. This process is known as ‘novation’.
Importantly ASX Clear does not have an obligation to
you, the underlying client. The rules of ASX Clear govern
arrangements once a deliverable exchange traded option
has been exercised.
11.2 Client trust accounts and collateral
In order for us to trade an exchange traded option
contract for you, we require you to provide us with money
or property to enable us to manage the risks associated
with our dealings for you in exchange traded options. The
required funds will be withdrawn from your settlement
account (in some circumstances we may allow you to use a
loan from a financial institution to meet your obligations).
Client money and property paid or given by you in
connection with our advising or dealing in exchange
traded options must be held by us in trust in accordance
with the Corporations Act 2001 (Cwlth) and the relevant
Market Integrity and Operating Rules. Funds required for
settlement with the market will be withdrawn from your
settlement account.
Money may be held on trust for you, however, this does
not apply to money paid to reimburse us for payments
we have had to make to ASX Clear (generally margin calls
and payment of option premium) in respect of dealings
for you. The Corporations Act provides that money held in
the trust account can be used for specific purposes such
as meeting margin obligations, guaranteeing, securing,
transferring, adjusting or settling dealings in derivatives.
CHESS sponsored securities (held by you) may be lodged in
your name with ASX Clear as collateral for margin obligations
relating to exchange traded option trades. When CHESS
sponsored securities are lodged with ASX Clear, the securities
are held by ASX Clear as ‘third party security’. The lodged
securities cannot be used by us in relation to our dealings
or for our other clients in relation to their dealings unless
authorised by you as third party collateral. Securities in a
client’s superannuation fund cannot be used as third party
collateral for any other account.
11.4 Additional features
In certain circumstances permitted under the Corporations
Act and ASX Operating Rules, we may take the opposite
position in an exchange traded options contract, either
acting on our own account or for another client.
E TRADE reserves the right to terminate its services to
you on the occurrence of certain events, or by giving you
at least 5 business days’ notice. On termination, we will
close out all open contracts we have entered into for you
unless you have directed us to transfer those contracts to
another participant.
12. Dispute resolution system
You may advise us of any complaint or dissatisfaction with
the service or advice provided to you by E TRADE, or
you may refer a complaint against us to any appropriate
regulatory or other body, including ASX Settlement or
the Financial Services Ombudsman. The following dispute
resolution procedure is in place to ensure that your
enquiries and complaints are handled efficiently.
1. Contact E TRADE or E TRADE’s DTR Manager and
advise us of your complaint. A representative of
E TRADE will attempt to resolve your complaint
and will notify you of any proposed resolution.
2. If your complaint is not resolved to your satisfaction,
please send your complaint in writing to:
Complaints Manager
Phone: 1300 658 355
Post: Complaints Manager
ETRADE Australia Securities Limited
Reply Paid 1346
ROYAL EXCHANGE NSW 1224
3. You may refer the matter to the Financial Ombudsman
Service (FOS) of which E TRADE is a member. FOS can
be contacted as below:
Financial Ombudsman Service
11.3 National guarantee fund
Phone: 1300 780 808
The National Guarantee Fund (NGF) provides investors
with protection in the following circumstances:
Post: Financial Ombudsman Service
GPO Box 3
Melbourne VIC 3001
(a) if an equity exchange traded option is exercised, the
NGF guarantees completion of the resulting trades
in certain circumstances; and
(b) if you have entrusted property to E TRADE in the
course of dealing in exchange traded options, and
E TRADE later becomes insolvent, you may claim on
the NGF, in accordance with the rules governing the
operation of the NGF, for any property which has not
been returned to you or has not otherwise been dealt
with in accordance with our obligations to you. There
are limits on claims to the NGF for property entrusted.
Fax: (03) 9613 6399
Website: www.fos.org.au
If you require further information on how complaints
are handled by E TRADE, please visit our website at
www.etrade.com.au or refer to our Financial Services Guide.
For more information on the possible protections offered
by the NGF see www.segc.com.au
11
13. Taxation implications
The tax implications of trading options can be complex
and can vary widely depending on your individual
circumstances and the trading strategies you adopt .
We highly recommend you speak to a tax adviser to
confirm the taxation implications specific to your
particular circumstances.
For general information about the possible tax
implications of options transactions, please refer to the
ASX website.
13.1 Settlement account
Interest received on the margins held in the ASX clearing
account are paid into your settlement account and should be
included in your assessable income in the year it was paid.
12
PART TWO: SCHEDULE OF FEES
(f)Interest
If your E TRADE Settlement Account becomes overdrawn, due
to that account being debited for settlements required with
ASX Clear in relation to trades or with ASX in relation to exercise
or assignment, interest is charged at the rate determined by
the financial institution with which the E TRADE Settlement
Account has been established.
This is Part two of the E TRADE Exchange Traded Options
Product Disclosure Statement and should be read in conjunction
with Part one of the PDS dated 11 July 2014, which describes the
exchange traded option products traded by E TRADE.
Costs associated with trading exchange
traded options
(g)
E TRADE provides rebates to online retail clients who trade
ETO’s more than 10 times per calendar month on the one
account, on the following basis:
Unless otherwise stated, the fees and charges quoted in this PDS
are stated inclusive of GST.
E TRADE provides the facility to trade Exchange Traded Options
(“ETOs”) to its online retail clients that utilise the execution,
clearing and settlement services of E TRADE.
(a)
Executed Single-Leg Option orders placed by phone will
be charged at the standard brokerage rates set out above,
plus an additional charge of $38.50.
Executed Multi-Leg Option orders will be charged per leg
at the standard brokerage rates set out above.
(b)
For the 11th to 20th ETO trade per calendar month on the one
account, a $5 rebate for each of those trades; for the 21st and
subsequent ETO trades per calendar month on the one account,
a $10 rebate for each of those trades. Equities trades do not
count towards ETO trade rebates.
Opening or closing an exchange traded option contract
E TRADE charges retail clients, using E TRADE’s online ETO
trading facility to open or close a Single-Leg ETO contract,
a standard brokerage rate of the greater of $44.95 per trade or
0.55% of the traded value of the contract.
Buy write trading
Buy Write trading is charged using a combination of the cost
of both the Option and Equity trade components, with the
Option trade component charged at the standard brokerage
rates set out above.
Rebates to online retail clients
(h)
General information
All brokerage, ASX Clear fees and any applicable GST are shown
separately on your Contract Note.
Brokerage and fees that are charged on your Contract Note
may be tax deductible. You must confirm this with your own Tax
Adviser or Accountant, in relation to your specific situation.
We may introduce new fees, or change existing fees, at any time.
If we do so, we will give you at least 20 business days notice
before the introduction or change takes effect.
11 July 2014
Brokerage on the Equity trade component is charged in
accordance with the rates shown in E TRADE’s Financial
Services Guide.
(c)
Exercising equity exchange traded options
Equity options exercised will incur brokerage at the greater of
$44.95 or 0.22% of trade value plus an ASX Clear fee of $0.05
per option contract exercised plus GST.
(d)
Assigned equity exchange traded options
Assigned equity options will be charged brokerage at the
greater of $44.95 or 0.22% of trade value plus an ASX Clear fee
of $0.05 per option contract assigned plus GST.
(e)
ASX Clear fees
All exchange traded option trades incur an additional
ASX Clear fee of:
$0.13 per equity option contract traded plus GST; or
$0.45 per index option contract traded plus GST.
If you exercise or are assigned an equity option, ASX Clear
charges a fee of $0.05 per contract exercised or assigned
plus GST.
Index options are European in style which means the holder can
exercise only on the expiry date. On expiry, in-the-money index
options will be cash settled and charged an ASX Clear fee of
$0.35 plus GST per in-the-money contract settled.
Note: ASX Clear fees and any applicable GST are shown
separately on your Contract Note.
13

EXCHANGE TRADED OPTIONS PRODUCT DISCLOSURE STATEMENT (PDS) 11 JULY 2014 CONTENTS

Transcription

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