The progression of investment risk management - protect and benefit in changing markets
Feature article: Insuring your investments – how the ASX options market works
Executive summary
- Similar in purpose to buying insurance on your house or car, you can ensure you don't lose significant amounts of your investment capital on the ASX.
- Buying protection for your shares is termed a put option. When buying put options you pay a premium to lock in a value for shares you own at the agreed value or exercise price.
- Options can be used to either reduce risk (hedge -not risky) or to speculate (can be risky). Options are sometimes considered risky and overlooked.
- When you buy protection to hedge risk (the Gyrostat approach) it is the ASX who is the counter party.
- The ASX imposes collateral requirements on the seller of the option. The ASX had over $ 6 billion collateral from market participants at 30 June 2016
