KEY POINTS
Options trading is not popular in New Zealand or on the NZX, but is very common in the US markets.
"Options" are contracts that allow you to buy or sell a stock at a certain price in the future.
They are used as a tool for betting if the price of a stock will go up or down, without actually owning the stock itself.
Some people consider it a safer way to bet on stock prices, since buying an option is generally cheaper than buying the stock.
There are several brokers that allow you to trade US options from New Zealand.
What is an option?
An option is a contract that gives the holder the right (but not the obligation) to buy or sell an asset at a certain price by a certain date.
A call option gives you the right to buy.
A put option gives you the right to sell.
Just like stocks are traded on the stock market, options are traded on the options market.
Options belong to a group of financial instruments called "derivatives".
This means it doesn't have its own value per se, instead, its value depends on the value of another underlying asset or commodity.
This will make sense as we go through some examples.
Call Options
A call option gives you the right to buy a certain asset before a certain date.
You can trade options for all types of assets, from stocks to commodities to currencies, but in this article, we'll focus on stocks to keep things simple.
Example:
It's January 1 and the price of Apple (AAPL) is $120 per share.
You think it's going to go up.
However, buying 100 Apple shares will cost you $12,000, and you don't want to spend this much.
Instead, you decide to buy 100 Apple call options.
These are the details of your options:
- Strike price: $120
- Expiry date: December 31
- Cost: $10 each
- Total cost: $1,000 (100 options at $10 each)
In investor speak, this would be known as buying Apple $120 December 31 calls.
What does this mean?
It means you now own a contract that will give you the right (but not the obligation) to buy 100 Apple shares for $120 each, at any time before December 31.
Why would you want to own this contract?
Let's say by December, the price of Apple shares have doubled to $200.
Since you have call options at $120, you now have the right to buy Apple stock at $120, even though the market price is $200!
This is known as your options being "in the money".
This leaves you two options:
- Exercise the options. This means you will purchase 100 Apple stock for $120 each, and you can either hold them, or sell them on market instantly for $200 each, netting yourself a cool $80 per share.
- Sell the options. Your options will now be worth around $80 each, since they are "in the money". Simply sell them on the options market and collect your profit.
And what happens if Apple stock falls?
If Apple stock is trading for less than your strike price ($120) on December 31, then your options will be considered "out of the money" and will expire worthless.
Remember, you spent $1,000 to acquire these options which are now worth nothing, so you will have lost that $1,000.
Put options
A put option gives you the right to sell a certain asset.
Let's say it's January 1 and the price of Apple (AAPL) is $120 per share.
You think it's going to go down.
To benefit from the price going down, you buy 100 Apple put options:
- Strike price: $120
- Expiry date: December 31
- Cost: $10 each
- Total cost: $1,000 (100 options at $10 each)
In investor speak, this would be known as buying Apple $120 December 31 puts.
What does this mean?
It means these options will give you the right (but not the obligation) to sell 100 Apple shares for $120 each, at any time before December 31.
Why would you want these options?
Let's say by December, the price of Apple shares have fallen to $50.
Since you have put options at $120, you now have the right to sell Apple shares at $120, even though the market price is $50.
Again, this would mean your options are "in the money".
This leaves you two options:
- Exercise the options. This means you will purchase 100 Apple stock for $50 each on the market, and then sell them instantly at $120, netting yourself a cool $70 per share.
- Sell the options. Your options will now be worth around $70 each. Simply sell them on the options market and collect your profit.
And what happens if Apple stock rises?
If Apple stock is trading for more than your strike price ($120) on December 31, then your options will expire worthless, and you lose your $1,000.
Options Contracts Are Traded In Bundles Of 100
I remember the very first time I traded options, I wanted to buy UBER calls.
Since I was still learning, I only wanted to spend around $100 and see how everything worked.
I bought UBER $35 calls for $3 each.
In the "quantity" field, I put 30.
30 call options at $3 each, should be around $90, right?
Then a few days later I logged into my brokerage account and noticed a ton of my cash was missing.
I got on chat with support and asked them what was going on.
They told me - it looks like you purchased $9,000 of call options a few days ago.
What!!!
That's when I learned if you purchase options, each contract is actually for 100 options.
Meaning I hadn't purchased 30 options, I had purchased 3,000!
At $3 each, that was around $9,000.
Thankfully the UBER price had gone up during those few days, so my options were actually in the money.
I sold them immediately in a panic and actually made around $1,500 profit - a happy accident.
But that could have just as easily been a $9,000 loss.
So always remember - when you put "1" in the quantity field on your options form, that actually means 1 lot of 100.
1 option at $20 will not cost you $20, but $2,000.
How To Make Money With Options
With options you need two things to happen for them to be profitable:
- The stock needs to move in the right direction
- It needs to move enough to cover the cost of the option
An example:
Say we buy Apple $120 calls, for $20 each.
If the Apple price moves up to $130, this has moved in the right direction.
The market price is $130, and we have a contract that lets us buy stock at $120.
Instant $10 profit, right?
Not exactly.
Remember, you still need to cover the cost of the buying the options, which was $20.
Since the stock price has only moved $10 in your direction, and you spent $20 on the contract, you're still in a loss of $10.
For your calls to be profitable, you need the price to move at least $21 in your favour.
In this case, the share price would need to go up from $120 to $141.
That would mean you will cover the $20 cost of the calls, plus you will have $1 in profit.
You Can Buy *And* Sell Options
In the examples above, we've only talked about buying options.
However, you can also sell options to take the other side of the bet.
Example - Selling call options:
It's January 1 and the price of Apple (AAPL) is $120 per share.
You think it's going to go down.
You decide to sell 100 Apple call options.
These are the details of your options:
- Strike price: $120
- Expiry date: December 31
- Price: $10 each
- Total received: $1,000 (100 options at $10 each)
In investor speak, this would be known as selling Apple $120 December 31 calls.
This means whoever you sold these options to has the right (but not the obligation) to buy 100 Apple shares from you for $120 each, at any time before December 31.
Why would you want to sell call options?
The obvious reason is, it provides you with income.
You just sold 100 options for $10, for a total of $1,000.
If the share price of Apple is under $120 at December 31, the options expire worthless. You keep your $1,000 and smile!
But what if the share price of Apple is $200 at December 31?
This means the options are "in the money" and the holder will likely exercise the options to buy Apple stock from you at $120.
If you own Apple stock, you will be obligated to sell that stock to the options holder. If you don't own Apple stock, you will be obligated to buy it on market for $200, and sell it to the options holder for $120, netting you a loss of $80 per share.
Example - selling put options:
It's January 1 and the price of Apple (AAPL) is $120 per share.
You think it's going to go up.
You decide to sell 100 Apple put options.
These are the details of your options:
- Strike price: $120
- Expiry date: December 31
- Price: $10 each
- Total received: $1,000 (100 options at $10 each)
In investor speak, this would be known as selling Apple $120 December 31 puts.
This means whoever you sold these options to has the right (but not the obligation) to sell 100 Apple shares to you for $120 each, at any time before December 31.
If the share price of Apple is over $120 at December 31, the options expire worthless. You keep your $1,000 and smile!
But what if the share price of Apple is $50 at December 31?
This means the options are "in the money" and the holder will likely exercise the options to sell Apple stock to you at $120.
You will be obligated to buy Apple stock at $120, even though the market price is only $50, netting you an instant loss of $70 per share.
What An Options Trading Screen Looks Like

Looks busy, right?
Don't worry - you've already learned everything you need to understand this screen..
This is the options market for Microsoft stock.
A few basics:
- In the top left, you can see the current price of Microsoft, which is $347.50 per share.
- In the red box is the market for call options.
- In the blue box is the market for put options.
- In the green box I've marked the expiry date, which you can see ranges from 7 days all the way up to years. In this particular example, I've chosen an options length of 21 days.
Let's say we're interested in calls at $340.
To buy $340 calls, we can see the asking price (also known as "the ask") is $12.05.
To sell $340 calls, we can see the highest bid (also known as "the bid") is $11.85.
And what about puts?
Say we're interested in puts at $360.
To buy $360 puts, we can see the asking price is $17.10.
To sell $360 puts, we can see the highest bid is $15.60.
Again, remember! Each option consists of 100 contracts, so if we buy 1 put option at $17.10, it will cost us 100 x $17.10 = $1,700.
Are Options Risky?
As with all investments, options contain risk.
The obvious risk is that you can lose money, either the price you pay for the options (when you're the buyer), or the loss you will experience if they are exercised against you (when you're the seller).
The preconception that options are less risky than stocks is because they generally cost less than stocks, so they amount of money you can lose is less.
However, a stock is an asset that provides you ownership in a business, meaning they can be held long term with relatively little risk. On the other hand, an option is just a piece of (digital) paper that expires at a future date. It doesn't give you ownership in any assets, or provide you with any income.
Therefore options are akin to short-term trading, which in general contains much more risk than long-term passive investing.
However, options can be useful tools to de-risk your investments.
For example, if you buy Apple stock for $120, and then also sell call options at a strike price of $140, this can generate some income on top of your passive investments, while also not risking a capital loss (even if you are forced to sell at $140, you still make a profit). This is known as a "covered call", and is one example of how options can be used to complement your long-term investments.
These are advanced investing strategies, however, and should only be done by experienced investors who are well versed in how stocks and derivatives work.
Where Can You Trade Options In New Zealand?
My recommendation for options trading is Interactive Brokers.
They are the broker I use for all my non NZ/AU investments, and I've been very happy with them.
You can sign up for an Interactive Brokers account here.
You can also get up to $1,000 in free stocks using my referral link.