Using call options
NAB Equity Lending provides you with the opportunity to write call options by using the shares held as security for your Facility as specific cover for those options.
When you sell (or write) a call option, you give the buyer of the option the right to buy your shares at a specified price on or before a specified date. When you lodge the shares underlying your call option with the Australian Clearing House (ACH) as cover for your daily margin obligations in respect of that option, your call option is known as a specific covered call option.
How does using your shares as collateral for a covered call option work?
An example of how a covered call option strategy works in conjunction with a Facility is:
|
Step 1 |
You buy 3,000 XYZ shares at $5.50. XYZ shares have a security ratio of 70% |
$11,550 |
|
Step 2 |
You sell 3 call options for 30cents per share per contract (each contract has 1,000 shares) 3 call options x 1,000 shares x 30cents |
$900 |
|
Step 3 |
Your initial outlay is effectively reduced by the amount received from the call options Total outlay |
$16,500 |
* Doesn't include brokerage, interest on your loan or ACH costs.
In this example, by selling the call options you could earn an extra $900, thereby increasing the income generated from your share investment. Another way of looking at it is that you have reduced the effective price for the shares from $5.50 to $5.20 (i.e. the purchase price of $5.50 minus the call option premium of $0.30).
When selling a covered call option, you must take into account potential movements in the share price. Using the XYZ example above, the following scenarios could occur:
| Scenario | Result |
|
If the share price rises |
Your options may be exercised. If the options you sold had an exercise price of $6.00, regardless of how high the share price goes the maximum you will receive for them will be $6.00. While you will retain the $900 from writing the call options, you will forgo some of the capital gains if the share price exceeds $6.00. |
|
If the share price remains the same |
You have earned $900 extra income on your shares. |
|
If the share price falls |
The $900 you earned from selling the call options will offset some of the unrealised loss made on holding the shares. |
NAB Equity Lending recommends that you seek advice from your financial adviser before embarking on any strategy involving call options.
NAB Equity Lending is not obliged to permit clients to lodge shares mortgaged to it as specific cover for call options.
For further information on covered call options see Understanding Options Booklet. This is sourced from the Australian Stock Exchange (ASX). Retrieving this information indicates your acceptance of the Terms of use of the ASX website.
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Any advice on this page was prepared without taking into account the objectives, financial circumstances or needs of any particular person. Before acting on the advice you should consider the appropriateness of the advice having regard to your particular objectives, financial circumstances and needs. Where the advice relates to a financial product, you should obtain and consider the Product Disclosure Statement relating to the product before making any decision in relation to the product. To the maximum extent permitted by law, NAB and companies in the National Australia Bank Group expressly disclaim all or any liability which may arise out of the provision to or use by the recipient of this information and any other person.
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