Options Trading in New Zealand
Options are a popular derivative contract traders use to speculate on financial markets. Options trading is incredibly popular in the United States, but how popular is it in New Zealand? This guide explores the options trading industry in New Zealand.
Updated 3 November 2021
An options contract is a derivative allowing traders to speculate on the price of a security, such as shares, or a commodity, like oil or gold.
The instrument’s name “options” refers to the notion that the trader has the option to exercise the contract, meaning they receive physical delivery of the underlying asset or take the settlement in cash, supposing the strike price is more favourable than the market price when their contract expires.
Options contracts are very different to other derivatives, such as contracts for difference or futures contracts, because they have unique characteristics. Options contracts are often compared to insurance policies, as you pay a premium to secure a certain price in the future. If the price condition is not met, the contract expires and becomes worthless; if the condition is met, the counterparty that sold the contract pays out. For example, the price of an options contract depends on various factors, such as the contract duration, the underlying asset’s price, the strike price and the premium.
This options trading in New Zealand guide will introduce you to the concept of options contracts, how to trade options and where to trade options in New Zealand. Our Options Terminology guide is useful reading if you're unfamiliar with key terms referred to throughout this guide.
Summary
Know this first: Risks of trading options
Our guide covers:
An options contract is a derivative allowing traders to speculate on the price of a security, such as shares, or a commodity, like oil or gold.
The instrument’s name “options” refers to the notion that the trader has the option to exercise the contract, meaning they receive physical delivery of the underlying asset or take the settlement in cash, supposing the strike price is more favourable than the market price when their contract expires.
Options contracts are very different to other derivatives, such as contracts for difference or futures contracts, because they have unique characteristics. Options contracts are often compared to insurance policies, as you pay a premium to secure a certain price in the future. If the price condition is not met, the contract expires and becomes worthless; if the condition is met, the counterparty that sold the contract pays out. For example, the price of an options contract depends on various factors, such as the contract duration, the underlying asset’s price, the strike price and the premium.
This options trading in New Zealand guide will introduce you to the concept of options contracts, how to trade options and where to trade options in New Zealand. Our Options Terminology guide is useful reading if you're unfamiliar with key terms referred to throughout this guide.
Summary
- The instrument’s name “options” refers to the notion that the trader has the option to receive delivery of the underlying asset or receive the settlement in cash.
- Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying financial instrument at a specified price on or before a specified date.
- Options are typically exchange-traded derivatives traded in a regulated marketplace and cleared by an independent clearinghouse, ensuring buyers and sellers uphold their obligations.
- Options can be used to trade any financial market, such as stocks, indices, bonds, ETFs, commodities and other assets. The most common use case for options contracts is to trade stocks.
- From New Zealand, you can trade futures with Tiger Brokers, Interactive Brokers, Jarden and others.
- The value of an options contract is not based solely on the underlying asset; that’s why brokers like Plus500 and IG Markets offer trading CFDs on options.
- Most options markets are located in the United States; it can be quite inconvenient for New Zealanders to trade during the most liquid hours because of the time zone difference.
Know this first: Risks of trading options
- Options contracts are complex. Without thoroughly understanding the characteristics of options contracts, you risk overpaying options premiums and ultimately losing money.
- Buying options contracts carry limited risk. However, selling options contracts has a potentially unlimited downside, which is another reason to ensure you fully understand the characteristics of options contracts.
- This guide is not exhaustive, and you should undertake substantial research and practising before thinking about trading options.
Our guide covers:
Introduction to options contracts
Options contracts are derivatives, a financial instrument that lets traders speculate on financial markets without actually buying, selling or owning the underlying asset. Options contracts have several unique characteristics and, in many ways, function like an insurance policy that protects traders from price fluctuations or changes in availability.
Options contracts have been used for centuries. Before modern financial markets existed, options were used in the agriculture sector to secure the rights to certain land, crops, produce or tools, without being obligated to buy the underlying product.
The first reputed use of an options-style contract occurred in ancient Greece by mathematician and philosopher Thales of Miletus; the anecdote lays a good foundation for understanding the function of options. He predicted that an olive harvest would be larger than usual during the off-season, so he acquired the right to use many olive presses for the following spring. When spring arrived, and the olive harvest was indeed larger than expected, he exercised the option, and he sub-leased the presses at a much higher price than originally agreed during the off-season.
Options contracts are used in various sectors, such as agriculture, real estate, energy, mining and financial markets. In the 21st century, the most common use of options contracts is trading equities, i.e. stocks.
Confused by the terms used above? Our Options Terminology explains what you need to know if you're unfamiliar with key terms.
Options contracts have been used for centuries. Before modern financial markets existed, options were used in the agriculture sector to secure the rights to certain land, crops, produce or tools, without being obligated to buy the underlying product.
The first reputed use of an options-style contract occurred in ancient Greece by mathematician and philosopher Thales of Miletus; the anecdote lays a good foundation for understanding the function of options. He predicted that an olive harvest would be larger than usual during the off-season, so he acquired the right to use many olive presses for the following spring. When spring arrived, and the olive harvest was indeed larger than expected, he exercised the option, and he sub-leased the presses at a much higher price than originally agreed during the off-season.
Options contracts are used in various sectors, such as agriculture, real estate, energy, mining and financial markets. In the 21st century, the most common use of options contracts is trading equities, i.e. stocks.
Confused by the terms used above? Our Options Terminology explains what you need to know if you're unfamiliar with key terms.
Options contracts comparison with insurance contracts
The reason options contracts are compared to insurance policies is the way they’re structured. Every options contract involves two parties, the buyer and the seller. The seller is essentially the underwriter taking a bet that the contract will expire worthless, allowing them to keep the premium just like an insurance company bets you won’t have an accident.
The value of the underlying asset is only part of the equation calculating the premium of an options contract, just like how a car insurance policy isn’t priced solely on the value of the car. Options contracts consider the likelihood of the contract expiring in-the-money, just like an insurance policy considers the likelihood of an insurable event taking place.
The variables used to determine an options contract premium are the distance between the current price and the strike price, the duration of the contract and the volatility of the underlying asset.
If an options contract expires out-of-the-money, the contract becomes worthless, and the contract seller keeps the premium; this is similar to how an insurance company keeps the premium, supposing you don’t make a claim. However, if the contract expires in-the-money, the contract seller must pay out the difference between the strike price and the market price; similarly, if you have a car accident, the insurance company is obligated to pay out the difference between the excess and the value of the accident.
Options contracts can be exercised at any point before they expire; the buyer of the option doesn’t have to wait for the expiration date. Similarly, you can submit a claim to your insurance company at any time.
The options buyer risks the premium but has potentially unlimited gains. In contrast, the options seller keeps the premium, supposing the buyer loses but has potentially unlimited losses if the buyer wins.
Confused by the terms used above? Our Options Terminology explains what you need to know if you're unfamiliar with key terms.
The value of the underlying asset is only part of the equation calculating the premium of an options contract, just like how a car insurance policy isn’t priced solely on the value of the car. Options contracts consider the likelihood of the contract expiring in-the-money, just like an insurance policy considers the likelihood of an insurable event taking place.
The variables used to determine an options contract premium are the distance between the current price and the strike price, the duration of the contract and the volatility of the underlying asset.
If an options contract expires out-of-the-money, the contract becomes worthless, and the contract seller keeps the premium; this is similar to how an insurance company keeps the premium, supposing you don’t make a claim. However, if the contract expires in-the-money, the contract seller must pay out the difference between the strike price and the market price; similarly, if you have a car accident, the insurance company is obligated to pay out the difference between the excess and the value of the accident.
Options contracts can be exercised at any point before they expire; the buyer of the option doesn’t have to wait for the expiration date. Similarly, you can submit a claim to your insurance company at any time.
The options buyer risks the premium but has potentially unlimited gains. In contrast, the options seller keeps the premium, supposing the buyer loses but has potentially unlimited losses if the buyer wins.
Confused by the terms used above? Our Options Terminology explains what you need to know if you're unfamiliar with key terms.
Important - Options Terminology
Options contracts are structured very differently from other derivatives, such as CFDs and futures contracts. To understand how options contracts work, you should first understand the following characteristics of options contracts.
Other licensed market operators in New Zealand are ICE Futures U.S., Inc, ICE Futures Europe and Australian Securities Exchange Limited. These companies are licensed to distribute their existing overseas markets to participants who may provide the products to New Zealand investors or traders. For example, Interactive Brokers is registered as a participant with ASX, ICE Europe and ICE U.S.
Strike price
The strike price is the price the options contract buyer and seller agree to buy or sell the underlying asset in the future. The strike price has standardised intervals that vary by underlying product and determined exchange rules. Here are some strike price examples for different options contracts:
The options buyer is not obligated to buy or sell the underlying asset when the contract expires. Therefore, if the trader bought a call option and the strike price is higher than the market price, it doesn’t make sense for them to pay more than the market price for the underlying asset, allowing the contract to expire worthless and lose the premium they paid. If the buyer truly wants to own the underlying asset, they can buy it cheaper from the market.
- Amazon, with a current price of US$3,335.55, has a US$5.00 interval between strike prices. The option chain contains the following strike prices: 3,330.00, 3,335.00, 3,340.00, 3,345.00, 3,345.00, etc.
- Apple, with a current price of US$148.69, has a US$1.00 interval between strike prices up to $150, then the interval increases to US$2.50. The option chain contains the following strike prices: 146.00, 147.00, 149.00, 150.00, 152.50, 155.00, 157.50, etc.
- Gold, with a current price of US$1796.30, has a US$5.00 interval between strike prices. The option chain contains the following strike prices: 1,790.00, 1,795.00, 1,800.00, 1,805.00, 1,810.00, etc.
- Spark New Zealand, with a current price of NZ$4.55, has a NZ$0.50 interval between strike prices. The option chain contains the following strike prices: 3.50, 4.00, 4.50, 5.00, 5.50, 6.00, etc.
The options buyer is not obligated to buy or sell the underlying asset when the contract expires. Therefore, if the trader bought a call option and the strike price is higher than the market price, it doesn’t make sense for them to pay more than the market price for the underlying asset, allowing the contract to expire worthless and lose the premium they paid. If the buyer truly wants to own the underlying asset, they can buy it cheaper from the market.
Options style (exercise style)
There are several styles of options contracts. The most common style, which is described in this guide, is American options. Other styles are European, Asian, Barrier, Exotic and Binary options. American options are probably the easiest to understand and most flexible to operate.
With American-style options contracts, buyers can exercise the contract at any time on or before the expiration date, providing the market is open. In contrast, traders can only exercise European-style options on the expiry date.
With American-style options contracts, buyers can exercise the contract at any time on or before the expiration date, providing the market is open. In contrast, traders can only exercise European-style options on the expiry date.
Underlying asset or instrument
Every options contract features an underlying asset or instrument, which is the subject of the contract and one of the principles determining the options price. An underlying asset could be AAPL shares, and an underlying instrument could be a Gold Nov 2021 (GCX1) futures contract. Options futures give the buyer the right to buy or sell a derivative, meaning they are derivatives of derivatives.
Options can be used for any asset or instrument, for example, stocks, futures contracts, real estate, or even olive presses.
Options can be used for any asset or instrument, for example, stocks, futures contracts, real estate, or even olive presses.
Buy/Sell (Long/Short)
Every options contract has a buyer and seller. In options trading, the terms buy and sell are not related to whether you expect the underlying asset’s price to rise or fall, as with other investment products. Buying and selling refer to whether you’re buying the contract or selling the contract.
Usually, the counterparty selling or issuing derivatives is a broker. Because options contracts are typically traded on exchanges, anyone can sell options, also considered writing an options contract.
Anyone selling options contracts must be prepared to deliver the underlying asset when the contract is exercised. If the seller does not own the asset, they are obligated to purchase it at the current market price in the open market. Because selling options essentially has unlimited risk, it’s typically only practised by professional trading firms rather than the average MoneyHub reader. The most common way to trade options is to buy contracts, which offers limited and controlled risk with potentially unlimited upside.
Usually, the counterparty selling or issuing derivatives is a broker. Because options contracts are typically traded on exchanges, anyone can sell options, also considered writing an options contract.
Anyone selling options contracts must be prepared to deliver the underlying asset when the contract is exercised. If the seller does not own the asset, they are obligated to purchase it at the current market price in the open market. Because selling options essentially has unlimited risk, it’s typically only practised by professional trading firms rather than the average MoneyHub reader. The most common way to trade options is to buy contracts, which offers limited and controlled risk with potentially unlimited upside.
Put/Call
A call option gives the buyer the right to buy the underlying asset from the seller at the previously agreed price (the strike price) on or before the expiration date. Conversely, a put option gives the buyer the right to sell the underlying asset to the seller at the strike price, on or before the expiration date. You would use a call option if you expect the underlying asset’s price to rise, whereas a put option would be used if you expect the price to fall.
Expiration date
The expiration date is the agreed-upon date when an options contract expires. Traders buying options pay a premium for the right to secure a price for an underlying asset in the future. One of the factors influencing the premium value is the duration of the contract. Expiry dates vary depending on the underlying asset. For example, stock options expire on Fridays, whereas options on other instruments like oil or gold futures expire a few days before the underlying futures contract expires.
Price
Options prices are quoted by the buyers and sellers participating in an options exchange. Several factors determine the price people are willing to pay to buy or sell contracts. In general, the price increases based on the higher likelihood the contract will be exercised in-the-money. The further the expiry date, the closer the strike price is to the market price and the volatility of the underlying asset impacts the price of an option contract.
Options prices are expressed per unit, for example, per share, ounce, barrel or euro. However, options contracts have set lot sizes, also known as the multiplier. For example, US stock options are traded in contracts of 100 shares, UK stock options are traded in contracts of 1,000 shares, gold futures options are 100 ounces, oil futures options are 1,000 barrels, and EUR/USD futures options are 125,000 euros.
Options prices are expressed per unit, for example, per share, ounce, barrel or euro. However, options contracts have set lot sizes, also known as the multiplier. For example, US stock options are traded in contracts of 100 shares, UK stock options are traded in contracts of 1,000 shares, gold futures options are 100 ounces, oil futures options are 1,000 barrels, and EUR/USD futures options are 125,000 euros.
Premium
Traders buying options contracts pay a premium to the seller who is on the other side of their contract and liable for all the risk. The only risk assumed by the buyer is the premium they pay the seller. The premium is calculated by multiplying the price by the contract size. For example, if the price for an Apple call option with a $145 strike price expiring on 12-11-2021 (AAPL/12X21C145) is 5.55, the premium would be $555.
Options exchanges
Options are typically, but not exclusively, traded on exchanges. In most cases, when someone refers to options, they refer to exchange-traded options, also known as listed options. In this guide, we’re referring to exchange-traded options.
Options are often traded on specialised derivatives exchanges alongside other products like futures. For example, Apple (NASDAQ: AAPL) shares are traded on the NASDAQ stock exchange, yet Apple options ( are traded on CBOE Futures Exchange. Similarly, Royal Mail (LON: RMG) shares, traded on the London Stock Exchange. Yet, Royal Mail options contracts are traded on Intercontinental Exchange.
Options are often traded on specialised derivatives exchanges alongside other products like futures. For example, Apple (NASDAQ: AAPL) shares are traded on the NASDAQ stock exchange, yet Apple options ( are traded on CBOE Futures Exchange. Similarly, Royal Mail (LON: RMG) shares, traded on the London Stock Exchange. Yet, Royal Mail options contracts are traded on Intercontinental Exchange.
Where to trade options in New Zealand
Options are traded on regulated options exchanges, such as the Chicago Board Options Exchange (CBOE), Bats Global Markets (BATS) or NYSE American (AMEX). Only large financial institutions can trade directly on an exchange, therefore to access an options market, you need to trade through a broker with membership to an exchange. Not every broker is a member of every exchange, so you should consider what products you want to trade before deciding on a broker.
Options trading is not as popular as other investment products in New Zealand, such as stock trading or CFD trading. Therefore, only a handful of brokers are available for New Zealanders to trade options.
Options trading is not as popular as other investment products in New Zealand, such as stock trading or CFD trading. Therefore, only a handful of brokers are available for New Zealanders to trade options.
Interactive Brokers
Interactive Brokers is a flagship brand in the online trading and investing community. It is an international broker licensed in numerous jurisdictions, providing access to dozens of instruments and thousands of products. Interactive Brokers supports over 30 options exchanges across North America, Europe and Asia-Pacific.
Tiger Brokers (NZ)
Tiger Brokers (NZ) is one of the largest online brokers amongst the Chinese trading community and gaining popularity worldwide. The company provides access to US, Hong Kong, Chinese, Singaporean and Australian markets and supports stocks & ETF trading, futures, options and warrants. With Tiger Brokers, you can trade US and Hong Kong stock options.
Plus500
Plus500 is an international CFD broker headquartered in Israel and listed on the London Stock Exchange (LON: PLUS). The company is licensed in several jurisdictions, including the UK, Australia, Cyprus, Singapore, Seychelles, and New Zealand. Among the numerous markets that Plus500 offers on its platform, the company provides CFDs on options.
IG Markets
IG Markets is a global online trading brand founded in 1974. The company is listed on the London Stock Exchange (LON: IGG) and is licensed in several regions. IG Markets offers its services to New Zealand from Australia; however, it is a licensed Derivatives Issuer authorised by the FMA. Among the thousands of CFD instruments that IG Markets offers, you can trade CFDs on options.
Frequently Asked Questions
Are options and binary options the same?
On the surface, it looks like binary options are similar to traditional exchange-traded options, but they are very different.
- Binary options have very short expiration dates, typically between 60 seconds and five minutes. Exchange-traded options have longer expiries, anywhere from one day to several months.
- Binary options are an over the counter product, meaning the counterparty is the binary options provider. Real options are traded on regulated exchanges between market participants.
- Binary options have limited profitability, whereas buying real options has unlimited profitability.
Is there an options exchange in New Zealand?
Yes. The New Zealand Exchange operates an options market. The NZX lists several dairy options and a few other equities and index products:
Due to the limited instruments listed, few brokers offer access derivatives listed on NZX. Only investment firms catering to institutional and high net worth clients participate in the NZX derivatives market.
- Whole milk powder (WMP)
- Skim milk powder (SMP)
- Milk Price (MKP)
- Spark New Zealand (NZX: SPK)
- Fletcher Building Limited (NZX: FBU)
Due to the limited instruments listed, few brokers offer access derivatives listed on NZX. Only investment firms catering to institutional and high net worth clients participate in the NZX derivatives market.
Do I need to own stocks to trade options?
No. While options contracts can be useful for hedging your stocks and protecting them from volatility, you don’t need to own shares to buy put options. Options are a popular instrument for speculating on financial markets without owning the underlying asset.
Do options have limited risk?
Options are often touted as having limited risk; this is only true if you buy options contracts. Buying and selling options are not related to going long or short or expecting the underlying asset price to rise or fall. You can buy put options contracts if you expect the price to fall, and you can buy call options contracts if you expect the price to rise. When you buy an options contract, you pay a premium, and that is your entire risk.
If you sell an options contract, you earn the premium; if the buyer’s contract closes out-of-the-money, the seller keeps the premium as their profit. However, if the buyer is profitable, the seller must settle the difference between the strike price and market price; this can potentially be an unlimited loss.
In summary, buying options has limited risk; selling options has unlimited risk.
If you sell an options contract, you earn the premium; if the buyer’s contract closes out-of-the-money, the seller keeps the premium as their profit. However, if the buyer is profitable, the seller must settle the difference between the strike price and market price; this can potentially be an unlimited loss.
In summary, buying options has limited risk; selling options has unlimited risk.
What is an option chain?
An option chain is a table showing quotes for the various options contracts for a given underlying asset. Because listed options are traded on exchanges, contracts need to be structured for participants to trade them efficiently. Each contract has an intrinsic value that is determined by multiple factors besides the underlying price. Therefore, there are numerous instruments for every underlying asset for each expiry date.
For example, at the time of writing, a Microsoft put option contract expiring on the 5th of November 2021 with a strike price of 310 is worth 5.80 but a put option with a strike price of 285 is worth 0.65. Each contract is considered a different instrument, each with bid and ask prices, volume and open interest. Below is a screenshot of the Microsoft option chain highlighting the independent pricing characteristics of each contract.
For example, at the time of writing, a Microsoft put option contract expiring on the 5th of November 2021 with a strike price of 310 is worth 5.80 but a put option with a strike price of 285 is worth 0.65. Each contract is considered a different instrument, each with bid and ask prices, volume and open interest. Below is a screenshot of the Microsoft option chain highlighting the independent pricing characteristics of each contract.
Image from SaxoTrader
Here are some examples of options contracts from the Microsoft option chain:
- MSFT/05X21C300
- MSFT/05X21P300
- MSFT/05X21C302.5
- MSFT/05X21P302.5
- MSFT/05X21C305
- MSFT/05X21P305
How can I learn more about options trading?
Options trading is a complicated topic. Like any topic related to financial services, there is a lot of misinformation spread by affiliate marketers trying to assure new investors that it’s easy to trade financial instruments. Trading any financial product is not easy, and options contracts are particularly complex.
One of the best options trading guides we found on YouTube is just under three hours long. Here are our favourite YouTube tutorials:
One of the best options trading guides we found on YouTube is just under three hours long. Here are our favourite YouTube tutorials:
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