asx_index_cfds_protecting_your_position - ASX Index CFDs...

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The use of exchange traded options (ETOs) in conjunction with ASX CFDs can deliver a protection strategy that offers more flexibility and may cost less than the guaranteed stop loss orders currently available for non-ASX CFDs. ASX CFD/ETO Protection Strategy The strategy to adopt will vary depending upon whether you have bought or sold ASX CFDs. ASX CFD POSITION ETO POSITION Long – You have bought ASX CFDs Buy a put option in the underlying index to protect your “long” CFD position; Short – You have sold ASX CFDs Buy a call option in the underlying index to protect your “short” CFD position. Strategy benefits This simple combination of ASX Index CFDs and ETOs has a number of benefits over guaranteed stop losses as a tool for managing and protecting your downside risk: Time and Flexibility: Both guaranteed stop losses and ASX CFD/ETO protection strategies will protect you if the market price for the ASX Index CFD moves beyond your down-side price limits. Importantly, the ASX CFD/ETO protection strategy gives you the time and flexibility to respond to any unexpected price deterioration. Most guaranteed stop loss products automatically close out your position. With the ASX CFD/ETO protection strategy the trade remains open, without exposing you to further down-side risk. This gives you the time and flexibility to review your trading strategy before responding. Cost effectiveness: An ASX CFD/ETO protection strategy may provide more cost effective protection than a comparable guaranteed stop loss product. This will vary, however, depending upon the characteristics of the option contracts used (such as time to maturity and strike price). In addition, if you trade out of an ASX Index CFD position without needing to use the protection of the ETO, the options, unless expired, will retain some value that can be realised by selling them back into the market.
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This note was uploaded on 08/30/2009 for the course FINM 3405 taught by Professor Philipgray during the Three '09 term at Queensland.

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asx_index_cfds_protecting_your_position - ASX Index CFDs...

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