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nabtrade ETO PDSWhy trade ETOs?An ETO gives you the right tobuy or sell a share or index at apredetermined price on or beforea predetermined date.That means you may be able to profitfrom the performance of a share orindex at a fraction of the cost of directshare investments. It also means youmay earn extra income from yourexisting portfolio while hedgingagainst possible price falls. And,because ETOs are exchange listed,you benefit from liquidity, standardisedcontracts, quick access to prices andthe use of an established and wellregulated exchange clearing house.ETOs can also involve substantialrisks, especially when you’re the seller(or writer) of an ETO contract. You willneed to actively monitor and manageyour open positions. So it’s importantto consider the risks as well as thebenefits before you decide to trade.Benefits of trading ETOsHedgingYou can use ETOs to hedge or protectyour share portfolio against a drop invalue. For example, buying put optionsover shares allows you to lock in asale price during the life of the option,regardless of share price movements.IncomeShareholders can earn income byselling call options over shares theyalready hold. As a seller of ETOs,you’ll receive premium income upfront.Remember, however, that you’ll needto meet margin obligations throughoutthe life of the position, lodging extracollateral if the price of the underlyingshare rises. And if the options areexercised, you’ll have to deliver theunderlying shares to the buyer at theexercise price, which may be belowthe current market price.Time to decideIf you buy a call option, the purchaseprice for the underlying share islocked in until the ETO expiry date.That gives you time to decide whetherto exercise the option and buy theshares. Similarly, when you buy a putoption, you have time to decide if youshould sell the shares.Less counterparty riskETOs are standardised securitiesregistered with a clearing andsettlement facility. For you as aninvestor, that means more certaintyand less risk from counterpartydefault. That’s because the clearinghouse, ASX Clear, stands betweenyou and the counterparty to eachtrade. Another benefit of this approachis that you can close out an openposition without having to dealwith the original counterparty.SpeculationSecurity prices fluctuate on a dailybasis. ETOs may be used to profitfrom these fluctuations if your view ofa future market movement is correct.The variety of option combinationsalso allows you to developsophisticated strategies designedfor different market conditions.07LeverageThe initial outlay for an optionscontract is less than you would needif you were to invest directly in theunderlying shares. You can buy anoption that represents a larger numberof underlying shares for less outlay, andstill benefit from a price move in theunderlying shares. This ability to makehigher percentage returns for a smallerinitial outlay is called leverage. Whileleverage can multiply your gains, it canalso multiply your losses, as discussedin “Risks of trading ETOs” below.DiversificationBecause your initial outlay is lowerwhen you trade options, you candiversify your portfolio and gainbroader exposure to a range ofshares, or even a market index.Risks of trading ETOsThe risk of loss in trading in ETOs canbe substantial, so you should carefullyconsider whether ETOs suit yourinvestment objectives and financialcircumstances. ETOs aren’t suitable forall investors. For example, if you placea high priority on protecting all of yourinvestment capital and avoiding thepotential for losses, then ETOs maynot be for you, since they have thepotential for unlimited losses.You should trade ETOs only if youunderstand how they work and theextent of the risks involved. Therisks of investing in ETOs will varydepending on the strategy you useand the kind of option you’re trading.This PDS doesn’t cover every riskassociated with trading ETOs.

nabtrade ETO PDSFor further information about the risksof ETO trading, see ETO risk disclosurestatement on page 37 of this PDS andsee the ASX booklet, “UnderstandingOptions Trading”, especially thesection “Risks of options trading” ons.pdfHere are some significant risks youneed to consider when decidingwhether to trade ETOs.Market movementsETOs are affected by movements in theunderlying share or index. If the marketmoves against you, your ETOs mayfall in price or become worthless ator before their expiry date.Price sensitive announcementsIn particular, the value of an underlyingshare is affected by information aboutthe company announced to ASX. If youinvest in ETOs you should reviewcompany announcements regularlyfor information that may affectthe share price.Price sensitive announcementsregarding shares are available onthe Trading Site and asx.com.auLeverageThe high degree of leverage involvedin many ETOs can work against you,multiplying your losses if the marketmoves against you.Limited life spanETOs have a limited life span. Theirtime value falls as they approach theirexpiry date, and they’re worth nothingafter they expire. That means you needto actively manage open positionsand act promptly to safeguard yourposition as the expiry date approaches.settle the contract. See “Margins”on page 15 for more.Limited life span becomes very relevantfor options that have a weekly expiry.Difficulties closing out a positionLoss of premium for buyersIf you buy an option and it expiresworthless, you’ll lose the premiumyou paid for the option, plustransaction costs. This is the maximumloss you can incur as a buyer of an ETO.Unlimited loss for sellersAs the seller of an ETO, you earn apremium. However, it’s importantto be aware that you can also incurunlimited losses if the market movesagainst your position.For example, if you’re the seller ofa call option and the price of theunderlying share rises, you’re atsignificant risk, especially if youdon’t own the underlying shares.If the option is exercised, you’ll beforced to buy the underlying sharesat the current (higher) market priceso you can deliver them to thebuyer at the exercise price.Similarly, when you sell a put optionand your option is exercised in a fallingmarket, you’ll be obliged to buy theunderlying shares from the buyer at aprice above the current market price.Loss of margin for sellersIf you’re the seller of an ETO, youcould lose all of the margin fundsyou’ve deposited with your brokerwhen the market moves against theoption position. As the seller, you mayhave to pay additional margin funds(that may be substantial) to maintainthe option position, or when you08In some cases, it could become difficultor impossible for you to close out aposition. The relationship betweenthe price of ETOs and the underlyingshare can also become distorted.For example, this could happen if: there’s a significant change in theprice of the underlying share overa short period of time there are no (or less willing) buyersand sellers in either the ETO marketor the underlying market, or the market is suspended ordisrupted for any reason.Underlying marketMarket events affecting the underlyingmarket for the share may make itdifficult for you to hedge or maintainyour exposure under an openETO contract.Automatic exerciseIf you’re the buyer of an open positionthat is in the money (see page 14),we’ll usually automatically exerciseyour ETO contract on expiry.Where your option is exercisedautomatically, we’ll create acorresponding share transaction.You’re responsible for making sureyou have the money or security tosettle that transaction.

nabtrade ETO PDSPowers of market regulatorsThe Australian Securities andInvestments Commission (ASIC)and ASX have discretionary powersregarding the market and how theclearing facility operates. They can takea wide range of steps to maintain fairand orderly markets, including: suspending the market or allowingthe options market to trade whilethe underlying securities are in atrading halt, as appropriate restricting the exercise of options terminating an option position orsubstituting another underlyingsecurity or securities imposing position limits orexercise limits, or terminating contracts.All of these actions can affect youroption positions and result in a loss.Trading disputesTrades made on ASX may be disputed.When this happens, the ASX Rules giveit the power to ask a broker to amendor cancel a trade. This will result in thecontract with the client being amendedor cancelled.In some situations, ASX may alsoexercise powers to cancel or varytransactions, or direct others tocancel or vary them.Trade amendmentsand cancellationsUnder our terms and conditions, we,ASIC and ASX can amend or canceltrades, which may potentially cause youto lose money or increase your losses.A trade executed on your behalf mayalso be amended or cancelled, evenafter it has been confirmed.System outagesTrades on ASX take place through anelectronic trading platform and arecleared by ASX Clear, which also relieson electronic systems. Those systemscan all fail or become temporarilydisrupted. Exchanges or participantsmay also be able to cancel transactionsunder their operating rules.A market disruption may mean thatyou’re unable to deal in ETOs, and maysuffer losses as a result. We may alsobe unable to execute all or part of yourorder according to your instructions.In these circumstances, you may notbe able to recover losses, given thelimits of liability imposed by ASX andASX Clear. enter into one or moretransactions to close out one ormore open positions, in line withASX Clear Operating Rules exercise one or more ETOcontracts in line with ASX ClearOperating Rules exercise any other rights providedunder the Corporations Act2001 (Cth), ASX Operating Rules,ASX Clearing Rules, our agreementwith you, or perform any otherobligations arising under theCorporations Act 2001 (Cth),ASX Operating Rules or ASX ClearOperating Rules for ETOs sell any underlying sharesbought in connection with yourETO account with us, and any othershares in your Trading Account withus, at your risk and expense if youdon’t pay us on demand choose not to transfer shares intoyour Trading Account with us untilyou’ve paid us, or purchase the required number ofshares, at your risk and expense.Our discretionUnder our terms and conditions, wecan take steps to close out or otherwisechange an open option position incertain limited circumstances. If: you don’t pay, or provide securityfor, amounts you owe us or don’tperform any obligation resultingfrom exercising or settling an ETOa guarantee or other securityyou’ve provided us, is withdrawnor becomes ineffective, orany other event occurs that we haveagreed with you entitles us to takeaction under that agreementthen we may, without warning, take orstop taking any reasonable action, inconnection with ETO contracts enteredinto regarding your ETO account, alongwith any other rights we may haveagainst you. We may also:Investment capitalBy trading in ETOs, you’re exposed tothe risk of losing capital. You shouldnever risk more capital than you canafford to lose. Speculation assumes ahigh degree of risk, with the distinctpossibility of financial loss.09If we take any of these actions uponyour instruction, you’re liable for anydeficiency, and entitled to any surplus,that may result.

nabtrade ETO PDS10ETO fundamentalsTypes of ETOsEquity optionsIndex optionsPurposeGives the buyer the right to buy or sell a parcel ofshares at a predetermined exercise price, on or beforethe expiry date.Gives the buyer the right to receive a cash payment ifthe market rises or falls to a predetermined level onthe expiry date.Settlement styleDeliverable: if an equity option is exercised,one party must deliver the underlying security.Cash settled: if an index option is exercised, the buyerhas the right to receive a payment from the seller.The size of the payment depends on the differencebetween the exercise level and the Opening PriceIndex Calculation (OPIC) calculated by ASX on theday the option expires.Exercise styleMost ASX equity options are exercised in the“American-style”. American-style options can beexercised on or before the expiry date. However, someare exercised in the “European Style”. European-styleoptions can only be exercised on the expiry date.ASX index ETOs are always European-style.European-style options can only be exercisedon the expiry date.Contract sizeUsually 100 shares.The exercise price of the option, expressed in points,multiplied by a set dollar value, usually 10 anindex point.For more information on the exercise and settlement of an ETO, see the section on “Trading and settlement” on page 14.Note: The expiry date can vary for example weekly or as set by the ASX.A call or a putETOs come in two varieties: calls and puts, and you can buy or sell either type. See the table below for more information.Equity optionsIndex optionsCallPutGives the buyer the right, but not the obligation,to buy a standard number of shares at the exerciseprice, on or before the expiry date.Gives the buyer the right, but not the obligation,to sell a standard number of shares at the exerciseprice, on or before the expiry date.If a buyer exercises their right to buy, ASX Clearassigns the exercise notice to a seller in the sameoption series. The seller must then sell the standardnumber of shares to the buyer at the exercise price.If the buyer exercises their right to sell, ASX Clearassigns an exercise notice to a seller in the sameoption series. The buyer must then sell the standardamount of shares to the buyer at the exercise price.If the closing level of the index is greater thanthe exercise level of the option, the buyer has theright to exercise the option and receive a payment.The amount is determined by multiplying thedifference between the closing level and the exerciselevel by an index multiplier specified by ASX.If the closing level of the index is less than theexercise level of the option, the buyer has theright to exercise the option and receive a payment.The amount is determined by multiplying thedifference between the closing level and the exerciselevel by the index multiplier specified by ASX.If the buyer exercises the option, ASX Clear assignsan exercise notice to a seller, who must then paythe equivalent amount.If the buyer exercises the option, ASX Clear assignsan exercise notice to a seller, who must then pay theequivalent amount.

nabtrade ETO PDS11Key featuresETO contracts have standardised terms and conditions set by ASX. Here are their key features, as they appear in the ETO detailswindow on the Trading Site.Key features of an option*ASX CodeUnderlyingsecurityExpirydateExercisepriceCall or PutPremiumPay-offdiagramIntrinsicvalue* The images represented here are of sample data only and don’t reflect real data.

nabtrade ETO PDS12FeatureDescriptionPremiumASX codeEach option series is identified by a six letter ASX code,with the first three letters consisting of the code for theunderlying security.Underlying securityThe security or index to which the ETO exposes you.Expiry dateThe date when unexercised options in the series expire:in this case, December 2010.This is the price of the option, setby buyers and sellers in the market— 0.285 per underlying share in thisexample. Since equity option contractsusually cover 100 underlying shares,the current price of one contract inthis series would be 28.50.Expiry dates are set by ASX, with each series ofoptions generally following one of these three cycles: January, April, July and October February, May, August and November, or March, June, September and December.Equity options expire on the Thursday before the lastFriday in the expiry month, (as long as both the Thursdayand Friday are full business days). So, if the last day ofthe month is a Thursday, the option will expire on theprevious Thursday.Index options expire on the third Thursday of the contractmonth (as long as that day is a business day). ASX Clear canchange these expiry dates if necessary.For more information about expiry days, see asx.com.auExercise price or levelFor an equity option, the exercise price or strike price isthe price for which the underlying security can be boughtor sold, if the option is exercised, expressed in cents.For index options, the exercise level is the index levelat which the buyer is entitled to a cash payment.Call or putEvery ETO is either a call (C) or put (P).AdjustmentsASX can adjust any of an option’s features to reflect corporate actions that affectthe underlying shares, such a bonus or rights issue, special dividend, capitalreduction, or other similar event.If ASX does adjust the option, it’ll try to do so without substantially changing theeconomic position of the seller and buyer at the time of the adjustment.In some cases, ASX may decide not to make an adjustment for a corporate action.Instead, ASX may terminate or close out open positions. When ASX adjusts theterms of an option series, ASX Clear will also make an adjustment to the termsof contracts that are already open.For more information about ASX option adjustments,see the “Explanatory Note for Option Adjustments” at asx.com.au/documents/resources/explanatory note option adjustments.pdfThe premium for an index optionis expressed in index points, ratherthan in cents. The price of an indexoption contract can be calculatedby multiplying the premium by theindex multiplier set by ASX for thatoption series, usually 10 a point.For example, a premium of 30 pointswith an index multiplier of 10 givesa price of 300 per contract.

nabtrade ETO PDSValuing optionsThe value of an option will fluctuate during its life, depending on factors including: the current price of the underlying share or the level of the underlying index the volatility of the underlying share or index the time remaining to expiry date (Options become less valuable as theyapproach expiry.) This becomes very relevant for short dated options interest rates dividends (Holding an option doesn’t give you the right to any dividendspaid on the underlying shares, unless you exercise a call option to becomethe owner of the shares before the ex-dividend date. Any fall in the priceof the underlying shares as the result of a dividend will affect the value ofyour option.)For more information about pricing options, see “Option pricing fundamentals”in ASX booklet, “Understanding Options Trading” at s.pdfAre you in the money?An ETO is said to be in the money, at the money or out of the money, dependingon the current price of the underlying security:Exercise pricelower thanprice of theunderlying securityExercise priceequal toprice of theunderlying securityExercise pricehigher thanprice of theunderlying securityCallIn the moneyAt the moneyOut of the moneyPutOut of the moneyAt the moneyIn the money13

nabtrade ETO PDSTrading and settlementAutomatic exerciseOpening a positionEntering into an ETO contract as either buyer or seller is called opening a position.After opening a position, you have several choices, depending on whether you’rethe buyer or the seller:Buyer(taker)Seller(writer)OpenChoicesBuy to open Sell to close: sell an option in respect of the sameunderlying equity or index to take a profit or limita loss. Allow to expire: hold the option to expiry and allowit to lapse.Sell to open14 Exercise the option. Buy to close: buy an option in respect of the sameunderlying equity or index to take a profit or limita loss. Allow to expire: hold the option to expiry and riskhaving it ex

Understanding Options Trading Understanding Option Strategies Understanding Margins Step 3 — Apply to trade ETOs You can apply to trade ETO’s: online at the Trading Site, or complete the forms in Part Four of this PDS and return them to us. Visit the Trading