Discussion on Option Trading in Australian Stock Exchange in relation to Volume
An option can be considered as the contract between two parties where the buyers or takers can get the rights but not the obligation to purchase or sale the security at the predetermined price or before the predetermined date in this context (Ni et al. 2021). In this regard, it can be stated that in relation to the Australian Stock Exchange for acquiring the rights, buyers or takers pay premium to the seller or writer of the contract in this context. In accordance with this discussion, it can be seen that throughout this process, the term shares or stocks can be referred as the underlying securities. However the standard number of shares which are covered by the one option contract on the ASX is 100. This number might change according to any kinds of adjustments events, like, capital recognition or any kinds of new issues within the underlying share in this context (Goncalves-Pinto et al. 2020). In the booklet these shares can be considered as per contract and it simply ignores the ASX as well as brokerage fees.
In accordance with this above discussion it can be seen that there are two types of options, namely, put options and call options. Hence, the discussion regarding these two options is given below, such as,
Put Options: In this option, the buyers or takers can get the right but not the proper obligations to sell the underlying shares at the predetermined price on or before the predetermined period (Augustin and Subrahmanyam, 2020). The taker or buyer of the out operations is required to deliver the underlying shares if they can exercise the options.
Call Options: This kind of option can allow the buyers or takers to avail the rights but not the obligation for purchasing any underlying shares at a predetermined price before or on the predetermined period (Augustin et al. 2019).
Hence, considering above discussion, it could be seen two options traded on ASX that are call options and put options. Call options are observed to be giving the taker the right, however, not the obligation to buy the shares underlying. On the other hand, put options would give right to the taker, however, not the obligation for selling the underlying shares. Moreover, in this context, ASX options market volume over the past two years have shown certain picturesque. In December 2022, around 4.91 Million options had been traded on Australian Stock Exchange or ASX (Chowdhury et al. 2020). This has been below the monthly average of approximately 5.5 Million as recorded from the month of January 2020 (statista.com, 2023). And, certain decrease from 5.8 Million as recorded could be seen than the previous month. Significantly, it is further to be seen that ASX options market is also significantly lower than the traded volume of the futures on ASX. In March 2020, the volume of options traded on the Australian Securities Exchange (ASX) surged in tandem with the global corona virus that is known as COVID-19 pandemic. It is interesting to note that the increase in volume was much smaller than the increase in the value of options that has been traded (Lei et al. 2020). It is also interesting to note that the most of the spike during the month was caused by call options, which allow the holder for purchasing shares or other financial instruments at a predetermined price at a later date. Put options, on the other hand, give holders the ability to sell the financial instrument at a predetermined value in the future. This would suggest that investors were trying to take advantage of the pandemic through locking in lower prices for the future with appropriate assumption that prices could rise further in subsequent months, which is why this month’s value increased.
Reference list
Augustin, P. and Subrahmanyam, M.G., 2020. Informed options trading before corporate events. Annual Review of Financial Economics, 12, pp.327-355.
Augustin, P., Brenner, M. and Subrahmanyam, M.G., 2019. Informed options trading prior to takeover announcements: Insider trading?. Management Science, 65(12), pp.5697-5720.
Chowdhury, R., Mahdy, M.R.C., Alam, T.N., Al Quaderi, G.D. and Rahman, M.A., 2020. Predicting the stock price of frontier markets using machine learning and modified Black–Scholes Option pricing model. Physica A: Statistical Mechanics and its Applications, 555, p.124444.
Goncalves-Pinto, L., Grundy, B.D., Hameed, A., van der Heijden, T. and Zhu, Y., 2020. Why do option prices predict stock returns? The role of price pressure in the stock market. Management Science, 66(9), pp.3903-3926.
Lei, Q., Wang, X.W. and Yan, Z., 2020. Volatility spread and stock market response to earnings announcements. Journal of Banking & Finance, 119, p.105126.
Ni, S.X., Pearson, N.D., Poteshman, A.M. and White, J., 2021. Does option trading have a pervasive impact on underlying stock prices?. The Review of Financial Studies, 34(4), pp.1952-1986.
statista.com, (2023), Monthly number of options traded on the Australian Securities Exchange (ASX) from January 2020 to December 2022, Available at: https://www.statista.com/statistics/1275660/asx-volume-options-traded-type-australia/ [Accessed on 31.05.2023]
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