ANZ SHARE INVESTING EXCHANGE TRADED OPTIONS PDS 21 OCTOBER 2016

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1 ANZ SHARE INVESTING EXCHANGE TRADED OPTIONS PDS 21 OCTOBER 2016

2 EXCHANGE TRADED OPTIONS Product disclosure statement (PDS) 21 October 2016 CONTENTS Important Information 3 Purpose of a PDS 3 About Share Investing Limited 3 PDS in two parts 3 Part One: General Information 4 1. What products does this PDS cover? 4 2. Overview of key risks 4 3. Introduction to ETOs ASX educational booklets 4 4. How Share Investing Limited deals with your orders Trading ETOs through Share Investing Limited How do your orders get executed? 5 5. What are ETO contracts? 5 6. How ETOs work Contracts Premium Factors affecting option premium Time value Dividends Entitlements Opening an option position Closing out of option contracts Expiry Exercise Automatic exercise Settlement 8 7. Potential benefits of ETOs 8 8. Significant risks of ETOs explained 9 9. Worked examples of potential profits and losses 9 Scenario 1 Income 1* 9 Scenario 2 Income 2* 10 Scenario 3 Speculation 1* 10 Scenario 4 Speculation 2* 10 Scenario 5 Hedging 1* 10 Scenario 6 Hedging 2* 10 Scenario 7 Leverage* Costs and amounts payable associated with trading exchange traded options Costs Margins Other significant characteristics of ETO contracts Trading and clearing options Client trust accounts and collateral National guarantee fund Additional features Dispute resolution system Taxation implications Settlement account 13 Part Two: Schedule of Fees 14 Costs associated with trading exchange traded options 14 2 Share Investing Limited ABN , AFSL No Retail Version 4

3 IMPORTANT INFORMATION The information in this Product Disclosure Statement ( PDS ) does not take into account your personal objectives, financial situation and needs. Before trading in these products referred to in this PDS you should read this PDS and be satisfied that any trading you undertake in relation to these products is appropriate in view of your objectives, financial situation and needs. While this PDS discusses the benefits of exchange traded options, you should be aware that there are also significant risks involved. We recommend that you consult your financial adviser or obtain other independent professional advice before trading in exchange traded options. PURPOSE OF A PDS This PDS has been prepared by Share Investing Limited ABN , Australian Financial Services Licence Number: ( we, our or us ), the issuer of the exchange traded options. We are obligated to provide you with this PDS. This PDS is designed to assist you in deciding whether the products covered in this PDS are appropriate for your needs. This PDS has been prepared to assist you in comparing this product with others you may be considering. Nothing in this PDS is to be construed as investment advice and this PDS is not a substitution to you obtaining professional advice. This PDS is an important document and we recommend you contact us should you have any questions arising from the PDS prior to entering into any transactions with us. Information relating to the products that is not materially adverse may change from time to time. This information may be updated and made available to you through our Website. A paper copy of any updated information is available for free upon request. ABOUT SHARE INVESTING LIMITED Share Investing Limited is a subsidiary of Australia and New Zealand Banking Group Limited (ABN ) (ANZ). We are an ASX and Chi-X Australia market participant, a clearing participant of ASX Clear Pty Limited and a settlement participant of ASX Settlement Pty Limited. ANZ is an authorised deposit taking institution (ADI) under the Banking Act 1959 (Cth). We are not an ADI and our obligations do not represent deposits or other liabilities of ANZ. ANZ does not stand behind or guarantee us. If you have any questions in relation to this PDS, please contact us: Address: 242 Pitt Street, Sydney NSW 2000 Post: Reply Paid 1346, Royal Exchange NSW 1224 Phone: Fax: Website: service@anzshareinvesting.com anzshareinvesting.com PDS IN TWO PARTS This PDS is in two parts. The first part contains all information other than the Schedule of Fees which is contained in the second part. Share Investing Limited ABN , AFSL No Retail Version 4 3

4 PART ONE: GENERAL INFORMATION 1. WHAT PRODUCTS DOES THIS PDS COVER? This is a Product Disclosure Statement for exchange traded options traded on the Australian Securities Exchange ( ASX ) and settled and cleared through the clearing house operated by ASX Clear Pty Ltd ( ASX Clear ). It deals with equity and index exchange traded options ( exchange traded options or ETOs ). A list of securities and indices over which exchange traded options are traded can be found on the ASX website. 2. OVERVIEW OF KEY RISKS Exchange traded options are high risk investments, which are only appropriate for experienced investors. The risk of loss in trading in ETOs can be substantial. Risks can vary significantly depending on the option traded. You should only trade exchange traded options if you understand the nature of the products and the extent of your exposure to risks. Some of the key risks that apply are: a. high levels of leverage are available through ETOs, which can increase losses; b. ETO values erode more quickly as the option approaches its expiry date; c. ETOs can be very volatile investments, as they can amplify movements in the underlying market. Options may fall in price or become worthless at or before expiry; d. if a bought option expires worthless, you will lose your total investment in the option; e. an option seller may incur unlimited losses if the market moves against them; and f. under certain conditions, it could become difficult or impossible to close out an ETO position. You should carefully read section 8 of this PDS for more information about some of the risks associated with investments in ETOs. 3. INTRODUCTION TO ETOS ETOs are a versatile financial product which can allow investors to: hedge against fluctuations in their underlying security portfolio; increase the income earned from their portfolio; and profit from speculation. Their flexibility stems from the ability to both buy and sell an option contract and undertake multiple positions targeting specific movements in the overall market and individual securities. The use of ETOs within an investor s overall investment strategy can provide flexibility to take advantage of rising, falling and sideways markets. However, both the purchase and sale of exchange traded options involves significant risks which are discussed in section 8. Specific concepts which should be understood before engaging in an options strategy are: the effect time has on any position/strategy, in particular, ETO values can erode quickly as an option approaches maturity; changes in volatility of the underlying security or index may affect your position and/or strategy; how to calculate margins and worst-case scenarios for any position and/or strategy; the likelihood of early exercise and the most probable timing of such an event; the effect of dividends and capital reconstructions on an option position and/or strategy; and liquidity of an option series, the role of market makers, and the effect this may have on your ability to exit a position and/or strategy. When buying an ETO the initial outlay of capital may be small relative to the total contract value so that transactions are leveraged or geared. Leverage can magnify losses. Transactions should only be entered into by investors who understand the nature and extent of their rights, obligations and risks associated with trading exchange traded options. When selling an ETO the initial income may seem attractive but the downside may be unlimited. Risk minimisation strategies should be considered to mitigate losses when a position does not move in a favourable manner. Whilst this PDS provides product information including information about the risks, characteristics and benefits of ETOs, investors should inform themselves and if necessary obtain advice about the specific risks, characteristics and benefits of the exchange traded option they intend to trade. 3.1 ASX educational booklets The ASX has prepared a number of educational booklets relating to exchange traded options which are available on the ASX website. In addition to reading this PDS, investors are advised that this PDS cross references certain ASX booklets. The ASX booklets that relate to options include Understanding Options Trading, Margins, and Option Strategies and they are available free of charge on the ASX website. These booklets provide useful information regarding options traded on the ASX, including option features, advantages of options, risks associated with options, option adjustments, option pricing, margins, taxation and option contract specifications. One of the ASX booklets entitled Understanding Options Trading is a booklet that we must give you when you choose to activate to trade exchange traded options and is also obtainable on the ASX website. 4 Share Investing Limited ABN , AFSL No Retail Version 4

5 If you cannot access the ASX booklets via the ASX website, please contact us immediately and we will arrange to forward copies of the booklets to you at no charge. If you have any questions on any aspect of the booklets you should consult us before making any investment decisions. 4. HOW SHARE INVESTING LIMITED DEALS WITH YOUR ORDERS 4.1 Trading ETOs through Share Investing Limited Before we will accept orders to trade ETOs on your behalf, you will need to have entered into a Derivatives Client Agreement with us. 4.2 How do your orders get executed? If we accept your orders, we will place them into the ETO market. We reserve the right to reject any ETO order received, or refer any such order received to one of our Designated Trading Representatives ( DTRs ), for review and determination of which orders will be placed into the ETO market. We offer our clients the ability to place orders in ETOs either by phone or via the internet. (Orders placed via phone may incur an additional charge please refer to Part Two: Schedule of fees.) 5. WHAT ARE ETO CONTRACTS? ETOs may be American or European style (index ETOs are European only). Most ASX equity options are American style which means they can be exercised at any time prior to the expiry day. European options, which includes index options, can only be exercised on the expiry day and not before. An equity exchange traded option is a contract between two parties which gives the buyer (the taker) the right, but not the obligation, to buy or sell the securities underlying the option at a specified price (exercise price) on, or before, a predetermined date. To acquire this right, the buyer pays a premium to the seller (writer) of the contract. Index options give you exposure to a market index, such as the S&P/ASX 200. They offer similar benefits to options traded over securities, except they offer exposure to the broad range of securities that make up an index. As with equity options, both call and put index options are available. However, there are a few differences: index options can only be exercised on their expiry date. However, an index option can still be closed out at any time; index options are cash-settled, meaning you will receive or pay a cash payment on exercise, and the settlement price is based on the opening price of the index on the morning of the expiry date; and the strike price and premiums for index options are expressed in index points, rather than as a cash value. The premium is not a standardised feature of the exchange traded option contract and is established between the buyer and seller at the time of the trade. See section 6.2 on premium in this PDS for more information. ETO sellers are often referred to as writers because they underwrite (or willingly accept) the obligation to buy or sell the securities (or index) covered by an option. Similarly, buyers are often referred to as takers of an exchange traded option as they take up the right to buy or sell a parcel of securities (or index). Every exchange traded option contract has both a buyer and a seller. There are two types of ETOs, namely call options and put options. All option positions consist of one or more of either a bought call, a sold call, a bought put, or a sold put. A long (or bought) option position is created by the purchase of a call or put. A short (or sold) position is created by the sale of a call or put. By combining two or more of these basic positions, an investor can create a trading strategy that meets a range of investment objectives, including the protection of an existing portfolio of securities. For more information on possible trading strategies we refer you to the ASX booklet entitled Options Strategies obtainable on the ASX website. Equity call options give the buyer the right, but not the obligation, to buy a standard quantity of underlying securities at a predetermined price on (or in the case of American style options, before) a predetermined date. If the buyer exercises their right to buy, the seller is required to sell a standard quantity of securities at the predetermined exercise price. Equity put options give the buyer the right, but not the obligation to sell a standard quantity of underlying securities at a predetermined price on (or in the case of American style options, before) a predetermined date. If the buyer exercises their right to sell, the seller is required to buy a standard quantity of securities at the predetermined exercise price. The premium is the price of the option contracts agreed to by the buyer and seller through the market. The buyer will always pay the seller a price (called the premium) to enter into the option contract. The seller receives and keeps the premium but has the obligation to buy from or deliver to the buyer the underlying securities at the exercise price if the buyer exercises the option. 6. HOW ETOS WORK This section explains how ETOs work, including: Contracts; Premium; Factors affecting option premium; Time value; Dividends; Entitlements; Opening an option position; Closing out of option contracts; Expiry; Exercise; Automatic exercise; and Settlement. Share Investing Limited ABN , AFSL No Retail Version 4 5

6 6.1 Contracts ETOs are created by the exchange on which the underlying security is quoted, or the securities that are constituents of the underlying index are quoted. We trade exchange traded options in relation to securities quoted on the ASX, as well as over some indices. The ASX website provides a list of securities and indices over which exchange traded options are traded, these can be found on the ASX website. ASX determines the key contract specifications for each series of exchange traded options listed, including: a. the underlying security or underlying index; b. the contract size where 1 exchange traded equity option contract on ASX usually (but not always) represents 100 underlying securities; c. the contract size for index option is $10 for each point; d. the exercise price (or strike price) is the price at which the buyer of an equity exchange traded option can buy or sell the underlying securities. The ASX sets the range of exercise prices at specific intervals according to the value of the underlying securities. It is important to note that the exercise price and/or contract size of an equity exchange traded option may change during the life of an option, for example if the underlying security is subject to a bonus or rights issue or other form of capital reconstruction. As noted above, the exercise price for index options is expressed in index points; and e. the expiry date exchange traded options have a limited pre-determined life span. Generally monthly ETOs follow one of three cycles, namely: i. January/April/July/October; ii. February/May/August/November; or iii. March/June/September/December. Weekly ETOs have a shorter life span and do not follow the above cycle. Weekly ETOs are generally available for trading on the Friday immediately following expiry of the earlier ETO series, for expiry the following Thursday. The ASX may in accordance with its operating rules make an adjustment to any of the above specifications, for example if the listed entity over which the option relates makes a prorata change to its ordinary share capital structure (eg. if bonus issues or special dividends are declared). If ASX does make an adjustment it is required to endeavour to preserve the open positions of buyers and sellers at the time of the adjustment as best as possible. The ASX provides further information regarding ASX option adjustments in an Explanatory Note for Option Adjustments which can be found on the ASX website. Full details of all exchange traded options listed on ASX and expiry date information can be found on the ASX website or alternatively through information vendors or newspapers. A list of current option codes and delayed price information is available on the ASX website. Details of the previous day s trading are published in summary form in the Australian Financial Review and in The Australian. If you cannot access this information, please contact us and we will provide you with the information. Details of contract specifications for exchange traded options are published by the ASX on their website. The contract specifications detail key standardised features of exchange traded options traded on the ASX. 6.2 Premium The premium (price of the option) is not set by the ASX. It is agreed between the buyer and seller of the exchange traded option through the market. The premium for an equity exchange traded option is quoted on a cents per security basis so the total premium payable is calculated by multiplying the premium amount by the contract size (commonly 100). For example, if you buy a call option with a premium quoted at 25c per security and a contract size of 100, the total premium is $25.00 (being $0.25 x 100). The premium for an index option is calculated by multiplying the premium by the index multiplier. For example, a premium of 30 points, with an index multiplier of $10, represents a total premium cost of $300 per contract. 6.3 Factors affecting option premium Option premiums will fluctuate during the option s life depending on a range of factors including the exercise price, the price of the underlying securities or the level of the index, the volatility of the underlying securities or the underlying index, the time remaining to expiry, interest rates, dividends and general risks applicable to markets. For ETOs, market expectations and ultimately, the pressures of supply and demand will also determine the value of options. 6.4 Time value Time value represents the amount an investor is prepared to pay for the possibility that the market might move in their favour during the life of the option. The amount of time value will depend on whether the option is in-the-money, at-the-money or out-of-the- money. At any given time, the at-the-money option will have the greatest time value. The further in or out-of-the- money the option is, the less time value it will have. a call option is said to be in-the-money where the exercise price is less than the security price (or index level). a call option is said to be at-the-money where the exercise price equals the security price (or index level). a call option is said to be out-of-the-money where the exercise price is greater than the security price (or index level). a put option is said to be in-the-money where the exercise price is greater than the security price (or index level). a put option is said to be at-the-money where the exercise price equals the security price (or index level). a put option is said to be out-of-the-money where the exercise price is less than the security price (or index level). An option s time value is affected by the following factors: Time to expiry the longer the time to expiry, the greater the time value of the option. Time value declines as the expiry of the option draws closer. This erosion of time value is called time decay. It is not constant, but increases rapidly towards expiry. 6 Share Investing Limited ABN , AFSL No Retail Version 4

7 Volatility in general, the greater the volatility of the underlying asset, the greater the time value will be. This is because the seller is exposed to a greater probability of incurring a loss, and will require higher premium income to compensate for the increased risk. Interest rates an increase in interest rates will lead to higher call option premiums and lower put option premiums, all else being equal. This reflects the cost of funding the underlying securities. The buyer of a call option can defer paying for the securities until the option s expiry date, and invest the funds elsewhere during this period. As interest rates rise, more interest can be earned on the funds, so the call option is worth more to the option buyer. The effect of an interest rate rise is the opposite for put options, as the buyer is deferring the receipt, rather than the expenditure, of funds. 6.5 Dividends If a dividend is payable during the life of an option, the premium of a call option will be lower, and the premium of a put option higher, than if no dividend was payable. This is because securities tend to fall in value on going exdividend, all else being equal. Anything that leads to a lower price may make call options less valuable and put options more valuable. In practice, option pricing is complex and involves the use of mathematical formulae to calculate the intrinsic value and time value of options. This is general options information only. For more information on option pricing, you should refer to the section entitled Option pricing fundamentals in the ASX booklet Understanding Options Trading. You can obtain current price information on ETOs via our website. Alternatively, you can contact us on our details listed in the section entitled About Share Investing Limited in this PDS. 6.6 Entitlements Exchange traded options contracts do not entitle investors to dividends or other entitlements paid by the issuer of the underlying securities, unless the investor exercises the option to become the holder of the underlying securities at or before the relevant date for dividend or entitlement purposes. 6.7 Opening an option position The establishment of an exchange traded options contract is referred to as opening a position. Once the buyer of an exchange traded option has an open position they have three alternatives: 1. they can exercise the option; 2. they can hold the option to expiry and allow it to lapse; or 3. they can close out their position by selling an option in the same series as originally taken. The seller of an exchange traded option has two alternatives: 1. they can hold the option to expiry and risk being exercised against (if it is not exercised against, it will expire without any further obligation or liability on the seller); or 2. they can close out their position by buying an option in the same series as originally taken (provided it has not already been exercised against). 6.8 Closing out of option contracts An ETO position may be closed out by placing an order equal and opposite in effect to the original order this effectively cancels out the open position. An investor might close out an option contract: when there is a risk of unwanted exercise for both American and European style options; to take a profit; or to limit a loss. We will automatically treat a buy or sell order in a particular series as a close out against any opposite series held. Example If you have bought 10 contracts in Option X, and you place an order to sell 6 contracts in that same series, we will treat that sell order as a partial close out of your existing Option X bought position, and if that order is executed, your net bought position in Option X will be 4 contracts. Closing out can be achieved without reference to the original party to the trade because of the process of novation. ASX Clear is able to substitute a new buyer as the contract party when an existing buyer sells to close their position. The process of novation is discussed in more detail below in the section 11.1 entitled Trading and clearing options. 6.9 Expiry ETOs have a limited life span and every option within the same series, which has not already been exercised, will expire on the expiry day. The expiry day is a standard day set by the ASX. For monthly equity exchange traded options the option usually expires on the Thursday preceding the last Friday in the month, as long as both the Thursday and Friday are business days. Therefore if the last day of the month is a Thursday the option will likely expire on the Thursday prior (providing that both Thursday and Friday are business days). For monthly index exchange traded options, expiry is usually the third Thursday of the contract month (unless otherwise specified by the ASX). Weekly equity and index ETOs generally expire each Thursday but are not listed in weeks where they would expire alongside the monthly ETO. Expiry day information is available on the ASX website Exercise Buyers generally make the decision to exercise an exchange traded option contract. This means that an American style equity option seller may be exercised against at any time prior to expiry. European style options can only be exercised at expiry. 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8 The ASX will randomly allocate a seller to every exercised bought position. This means that if the buyer wants to exercise an equity exchange traded option contract and either buy or sell (depending on whether it is a call or a put) the securities subject to the contract at the exercise price then ASX randomly allocates a seller of that option and allocates the exercise against them. The seller must then sell the securities at the exercise price for a call or buy the securities at the exercise price for a put. The buyer of an option will generally only exercise for a profit and therefore the exercise may result in a loss to the seller of the option, depending on their initial costs. Once a seller has been allocated, the seller has lost the opportunity to close out their position and must effect the delivery or cash settlement obligations for the particular equity option contract. For index exchange traded option contracts which are European style and therefore can only be exercised on the expiry date, we will automatically exercise if the contract is one point in-the-money Automatic exercise Unless you or your authorised agent requests us to do otherwise by no later than 4.30pm Sydney time on the date of expiry, exchange traded option contracts will be automatically exercised if your contract is determined by ASX to be in-the-money (one cent in-the-money for equity options or one point in-the-money for index options). For call options the options will be in-the-money where the exercise price is below the closing price of the underlying securities. For put options the option will be in-the-money where the exercise price is higher than the price of the underlying securities. All unexercised option contracts will expire on the expiry date Settlement Exchange traded options are either deliverable or cash settled. Most exchange traded equity options are deliverable, that is they are settled with physical delivery of the underlying security, whilst index options are cash settled. Cash settlement occurs in accordance with the ASX Clear operating rules against the Opening Price Index Calculation (OPIC) as calculated on the expiry date. Payment for, and the delivery of underlying securities, on exercise of an open exchange traded option contract occurs via the ASX s Clearing House Electronic Subregister System (CHESS) on the settlement date following exercise. We are obligated to make payment/delivery to the ASX within this timeframe. For index options, a cash settlement amount calculated having regard to the opening price index calculation on expiry day, is paid to the exercising buyer on the day following the expiry date. The level used for settling index options is determined by special formula. If you intend on investing in index options you should take the time to understand these arrangements. For more information on settlement of index exchange traded options see the ASX booklet Understanding Options Trading section on Trading index options. We require that you settle at T+1 (that is during the day after the time the trade occurred) for all cash positions which arise from premiums, interest, and other cash transactions. You are also required to pay any margin amounts to us. Please see the discussion on margins in section POTENTIAL BENEFITS OF ETOS ETOs can have a number of potential benefits, including: investors can manage their risk by hedging (protecting) their portfolio from a drop in value. For example, put options can allow investors holding securities to hedge against a fall in the security price; investors can earn income by selling call options over securities they already hold. As a seller of options, the investor will receive the premium amount up front. The risk is that the seller of a call option may be exercised against and be required to deliver their securities to the buyer at the exercise price; by buying a call option, the purchase price for the underlying securities is locked in. This gives the call option holder time to decide whether or not to exercise the option and buy the securities. The holder has until the expiry date to make his/her decision. Likewise the buyer of a put option has time to decide whether or not to sell their securities; exchange traded options benefit from standardisation and registration with a clearing and settlement facility which reduces counterparty default risk. This process provides the benefit that the investor s position can be closed out without reference to the original counterparty and the investor s risk to that counterparty is transferred to the ASX Clear; the flexibility of entering or exiting the market prior to expiry permits an investor to take a view on market movements and trade accordingly. In addition a variety of option combinations allows investors to develop strategies regardless of the direction of the market; options do not require a rising market to make money, rather investors can profit from both rising and falling markets depending on the strategy they have employed. Strategies may be complex and strategies will have different levels of risk associated with each strategy; the initial outlay for an equity exchange traded options contract is not as much as investing directly in the underlying securities. Trading in options can allow investors to benefit from a change in the price of a security without having to pay the full price of the security. An investor can therefore purchase an option (representing a larger number of underlying securities) for less outlay and still benefit from a price move in the underlying securities. The ability to make a higher return for a smaller initial outlay is called leverage. Investors however, need to understand that leverage can also produce increased risks (see significant risks section below); and given the lower initial outlay attached to options, investors can diversify their portfolios and gain a broad market exposure over a range of securities or an index. 8 Share Investing Limited ABN , AFSL No Retail Version 4

9 8. SIGNIFICANT RISKS OF ETOS EXPLAINED The risk of loss in trading in ETOs can be substantial. It is important that you carefully consider whether trading ETOs is appropriate for you in light of your needs, investment objectives and financial circumstances. You should only trade ETOs if you understand the nature of the products and the extent of your exposure to risks. The risks attached to investing in ETOs will vary in degree depending on the option traded see the risks outlined below. This PDS does not cover every aspect of risk associated with ETOs. For further information concerning risks associated with ETO trading please refer to the ASX booklet Understanding Options Trading and in particular the section entitled Risks of option trading (the booklet can be found on the ASX website). ETOs are not suitable for some retail investors, for example, investors who have a low risk tolerance should not enter into ETO trades which have the potential for unlimited losses. In deciding whether or not you should trade exchange traded option contracts, you should be aware of the following matters relating to risk: a. the high level of leverage that is obtainable in trading ETOs (due to the low level of initial capital outlay) can work against an investor as well as for the investor. Depending on the market movement, the use of leverage may lead to large losses as well as large gains; b. ETOs have a limited life span as their value erodes more quickly as the option approaches its expiry date. It is therefore important to ensure that the option selected meets the investors investment objectives; c. ETOs can amplify movements in the underlying market. Options may fall in price or become worthless at or before expiry; d. the maximum loss in buying an ETO is the amount of premium paid. If the option expires worthless, the taker will lose the total value paid for the option (the premium) plus transaction costs; e. whilst the seller of ETOs earn premium income, they may also incur unlimited losses if the market moves against the option position. The premium received by the seller is a fixed amount; however the seller of an equity call option has increased risk where the price of the underlying security rises and the seller does not own the underlying securities. If the call option is exercised, the seller of the option is forced to buy the underlying securities at the current (higher) market price in order to deliver them to the buyer at the exercise price. Similarly where the market falls, the seller of an equity put option that is exercised is forced to buy the underlying securities from the buyer of the put option at a price above the current market price; f. sellers of ETOs could sustain a total loss of margin funds deposited with their broker where the market moves against the option position. In addition, the seller may be obligated to pay additional margin funds (which may be substantial) to maintain the option position or settlement of the contract. Margining is discussed below; g. under certain conditions, it could become difficult or impossible to close out a position. This can happen for example where there is a significant change in the price of the underlying security over a short time period; h. the ASX has discretionary powers in relation to the market. It has the power to suspend the market operation, or lift market suspension in options while the underlying securities are in trading halt if the circumstances are appropriate, restrict exercise, terminate an option position or substitute another underlying security (or securities), impose position limits or exercise limits or terminate contracts all to ensure fair and orderly markets are maintained as far as practicable. These actions can affect an investor s option positions; i. the placing of risk minimisation orders may not always limit an investors losses to the amounts that are expected. Market conditions may make it impossible for a broker to execute the risk minimisation orders. Strategies using combinations such as spreads or straddles may be as risky as taking a simple long or short position; j. transactions on the ASX may be subject to dispute. When a transaction is subject to a dispute the ASX has powers, in accordance with its operating rules, to request that a broker amend or cancel a trade, which may in turn result in the contract with the clients being amended or cancelled; k. we have the ability to refuse to accept your order, or to amend or cancel your order or trade, as stated in our Terms and Conditions and any Contract Note issued. This could cause you to suffer loss or increase your loss; and l. transactions on the ASX are executed on an electronic trading platform and cleared through ASX Clear. As with all such electronic platforms and systems, they are subject to failure or temporary disruption. If the system fails or is interrupted we will have difficulties in executing all or part of your order according to your instructions. 9. WORKED EXAMPLES OF POTENTIAL PROFITS AND LOSSES Scenario 1 Income 1* You are the holder of Security A and you wish to supplement your dividend income. You decide to sell a call option. You hold 1,000 Security A and the current market price for Security A is $8.72. Your Security A holding is currently valued at $8, (1,000 x $8.72). You sell 10 November Security A call options with an exercise price of $9.02 and a contract size of 100 securities. The premium payable to you for the option is $0.98. The total amount payable to you is $ ($ ($0.98 x 100 x 10) $34.95 brokerage $1.43 ASX Clear registration fee). Unless your Security A holding is held through a CHESS sponsored account and such securities are not already being used as margin, you will be required to provide us margin in connection with your obligations under the call option, as described in section 10.2 below. Share Investing Limited ABN , AFSL No Retail Version 4 9

10 The price of Security A has steadily fallen and at expiry Security A is trading at $8.47. Although your Security A holding is now valued at $8,470.00, the call option is not exercised and you have received $ by way of premium received for selling the option. At expiry, you have received $ (being your premium net of brokerage and ASX fees) and retained your Security A holding which is now valued at $8, Scenario 2 Income 2* You are the holder of Security A and you wish to supplement your dividend income. You decide to sell a call option. You hold 1,000 Security A and the current market price for Security A is $8.72. Your Security A holding is currently valued at $8, (1,000 x $8.72). You sell 10 November Security A call options with an exercise price of $9.02 and a contract size of 100 securities. The premium payable to you for the option is $0.98. The total amount payable to you is $ ($ ($0.98 x 100 x10) $34.95 brokerage $1.43 ASX Clear registration fee). Unless your Security A holding is held through a CHESS sponsored account and such securities are not already being used as margin, you will be required to provide us margin in connection with your obligations under the call option, as described in section 10.2 below. The price of the Security A has steadily risen and at expiry Security A is trading at $ Although your Security A holding is now valued at $10,520.00, the call option is exercised and you are required to sell 1,000 Security A at $9.02 (for a total of $ ). The total amount you receive under the option is $9,943.12, being $ (total premium received) + the amount you receive on exercise of the call option, being $8, ($9, (for sale of 1000 Security A) $19.95 brokerage) $0.55 (ASX Clear assignment fee). This represents a loss of $ relative to what your Security A holding would have been worth had you not sold the call option. Scenario 3 Speculation 1* You believe that Security A will rise in value in five months time. In June, Security A is trading at $9.58 and you believe that at the end of November, Security A will be trading over $ A November Security A call option with an exercise price of $9.47 and a contract size of 100 securities is currently offered for a premium of $0.38. You decide to buy 10 November Security A call options. The total amount payable for the November Security A call options is $ ($ ($0.38 x 100 x 10) + $34.95 brokerage + $1.43 ASX Clear registration fee). In November, the price of Security A has risen to $ You exercise the call option and receive 1,000 Security A shares for $9.47. You immediately sell the securities at the market price. Your profit is $883.70, being the your net sale proceeds (($10.82 x 1,000 $29.95) minus the total amount you paid to buy, and then exercise your option ($9.47 x 1,000 + $19.95) $0.55 $416.38). Scenario 4 Speculation 2* You believe that Security A will rise in value considerably in five months time. In June, Security A is trading at $9.58 and you believe that at the end of November, Security A will be trading over $ A November Security A call option with an exercise price of $9.47 and a contract size of 100 securities is currently offered for a premium of $0.38. You decide to buy 10 November Security A call options Amount payable for the November Security A call options = $ ($0.38 x 100 x 10) + $34.95 brokerage + $1.43 ASX Clear registration fee = $ In November, the price of Security A has fallen to $8.80. Your option is worthless and you lose the total premium paid plus brokerage and ASX fees ($416.38). Scenario 5 Hedging 1* You own 1,000 Security A currently trading at $9.47 and think the price may fall. Selling call options could offset any short term loss, but you would like to be able to lock in a sale price for your securities if the market does fall. You could buy 10 June Security A put options with an exercise price of $8.98 and a contract size of 100 securities for a premium of $0.67. The amount payable for the June Security A put options = $ ($0.67 x 100 x 10) + $34.95 brokerage + $1.43 ASX Clear registration fee = $ The price of Security A does fall to $7.97 prior to the expiry date and you decide to exercise your put option. In exercising the put option, your total sale proceeds are; ($8.98 x 1,000 $19.95) $0.55 = $8, When the amount you paid to purchase the put option is deducted, your net proceeds are $8, By buying the put option, you protected yourself and have reduced the impact of the fall in the share price of Security A by: $8, ($7.97 x 1,000 $29.95 (being the sale proceeds you would have received had you sold your Security A holding without exercising the put) $ = $ However, you have still made a loss on your holding of Security A over the relevant period in the amount of $1, ($9.47 x 1,000 (being the value of Security A at the beginning of the period) $7.97 x 1,000 (being the value of Security A prior to the expiry date) $ (being the protection from the put option) + $29.95 (brokerage for selling Security A)). Scenario 6 Hedging 2* You own 1000 Security A currently trading at $9.47 and think the price may fall. Selling call options could offset any short term loss, but you would like to be able to lock in a sale price for your securities if the market does fall. You could buy 10 June Security A put options with an exercise price of $8.98 and a contract size of 100 securities for a premium of $0.67 ($ = $ ($0.67 x 100 x 10) + $34.95 Brokerage + $1.43 ASX Clear Registration Fee). The price of Security A trends sideways and at expiry is trading at $9.47. Your option is worthless and you lose the total premium paid of $ Share Investing Limited ABN , AFSL No Retail Version 4

11 Scenario 7 Leverage* Buying call options allows you to profit from an increase in the price of the underlying securities. Suppose you believe Security A, currently trading at $5.57, will rise in price over the next few months. You do not want to pay the full $5, to buy 1,000 securities so you decide to buy 10 September call options with exercise price of $5.70 for a premium of $0.40 ($ = $ ($0.40 x 100 x 10) + $34.95 Brokerage + $1.43 ASX Clear Registration Fee). If you are correct and the price of Security A rises then the value of your option will also rise. You can then sell an equivalent call option to close out at any time prior to the expiry day and take your profit. You will not have to buy Security A if you don t want to. If the market doesn t move as expected, you can either close out the option and recoup some of your initial investment, or you can simply let the option expire worthless in September which would result in a loss of $ When you buy a call or put option, the most you can lose is the premium you have paid in the first place, with brokerage and fees. *These examples: assume that all orders are placed online (i.e. no additional telephone order charges are applied); and do not take into consideration the tax implications of your transactions. 10. COSTS AND AMOUNTS PAYABLE ASSOCIATED WITH TRADING EXCHANGE TRADED OPTIONS 10.1 Costs Part Two of this PDS contains information on the commission, brokerage and exchange fees attaching to exchange traded options Margins Sellers of options may be obligated to pay us margin. We calculate margin based on the prevailing ASX margin methodology. However, we charge additional amounts of margin, as described below. Margins are generally a feature of all exchange traded derivative products and are designed to protect the financial security of the market. A margin is the amount calculated by us as necessary to cover the risk of financial loss on an exchange traded options contract due to an adverse market movement. This means that if the price of your options moves against you, you will be asked to pay a margin which represents that adverse movement. Total margin for exchange traded options is made up of two components: Net Option Value is the net liquidating value for options positions. Final Risk is the potential change in the price of the option contract assuming the maximum probable inter day price move in the price of the underlying security or index. In times of extreme volatility an intra-day margin call may be made by ASX Clear and as a consequence, we may request that you pay this on the same day. We may call more margin from you, compared to the amount that it is obligated to be paid to ASX Clear. Our standard setting for margining clients is Net Option Value plus twice the Final Risk. We reserve the right to change the margin requirement without prior notice to you. The latest margin requirement is published on the website. ASX Clear margin obligations may be met by paying cash or by providing certain types of eligible collateral (eg. Securities and bank guarantees). ASX Clear applies a haircut in relation to the value of such collateral as a risk management tool, eg. ASX Clear generally values collateral held by it at 70% of its full value. This means that if the securities used by you as collateral have a market value of $10,000 only $7,000 will be counted as collateral cover for your margin calls. Cash is required to cover mark to market margins. Margin must be paid by you within 24 hours of you being advised of the margin call by us. The margining process used by ASX Clear is explained in detail in the ASX booklet Margins which is available on the ASX website. Any interest levied on late settlement and margin payments is due and receivable at the time the amount is levied and certainly within 1 business day of a demand being made by us. Example Assume: you sold one call option contract with the value of $609.00; and ASX determines the Final Risk amount for that option contract to be $ Your margin requirement will be: Final Risk $ Plus Net Option Value $ ASX Clear margin requirement $ Plus additional Share Investing Limited margin requirement (Final Risk) $ Total margin required $ Share Investing Limited ABN , AFSL No Retail Version 4

12 11. OTHER SIGNIFICANT CHARACTERISTICS OF ETO CONTRACTS There are a number of other significant characteristics of exchange traded options you should be aware of when dealing. These include: Trading and clearing; Client trust accounts and collateral; and National Guarantee Fund Trading and clearing options Exchange traded options are traded on the ASX s trading platform and cleared through ASX Clear. Participants of ASX must comply with the operating rules of the ASX and the ASIC Market Integrity Rules. Participants who clear option contracts must comply with the operating rules of ASX Clear. We are an ASX Market and Clear Participant authorised to execute exchange traded option contracts on the ASX s trading platform for such products, and to clear them through ASX Clear. ASX Clear stands between the buying and selling brokers (the ASX participants) and guarantees the performance to each of them. This process is known as novation. Importantly ASX Clear does not have an obligation to you, the underlying client. The rules of ASX Clear govern arrangements once a deliverable exchange traded option has been exercised Client trust accounts and collateral In order for us to trade an exchange traded option contract for you, we require you to provide us with money or property to enable us to manage the risks associated with our dealings for you in exchange traded options. The required funds will be withdrawn from your settlement account (in some circumstances we may allow you to use a loan from a financial institution to meet your obligations). Client money and property paid or given by you in connection with our advising or dealing in exchange traded options must be held by us in trust in accordance with the Corporations Act 2001 (Cwlth) and the relevant Market Integrity and Operating Rules. Funds required for settlement with the market will be withdrawn from your settlement account. Money may be held on trust for you, however, this does not apply to money paid to reimburse us for payments we have had to make to ASX Clear (generally margin calls and payment of option premium) in respect of dealings for you. The Corporations Act provides that money held in the trust account can be used for specific purposes such as meeting margin obligations, guaranteeing, securing, transferring, adjusting or settling dealings in derivatives. CHESS sponsored securities (held by you) may be lodged in your name with ASX Clear as collateral for margin obligations relating to exchange traded option trades. When CHESS sponsored securities are lodged with ASX Clear, the securities are held by ASX Clear as third party security. The lodged securities cannot be used by us in relation to our dealings or for our other clients in relation to their dealings unless authorised by you as third party collateral. Securities in a client s superannuation fund cannot be used as third party collateral for any other account National guarantee fund The National Guarantee Fund (NGF) provides investors with protection in the following circumstances: a. if an equity exchange traded option is exercised, the NGF guarantees completion of the resulting trades in certain circumstances; and b. if you have entrusted property to us in the course of dealing in exchange traded options, and we later become insolvent, you may claim on the NGF, in accordance with the rules governing the operation of the NGF, for any property which has not been returned to you or has not otherwise been dealt with in accordance with our obligations to you. There are limits on claims to the NGF for property entrusted. For more information on the possible protections offered by the NGF see Additional features In certain circumstances permitted under the Corporations Act and ASX Operating Rules, we may take the opposite position in an exchange traded options contract, either acting on our own account or for another client. We reserve the right to terminate our services to you on the occurrence of certain events, or by giving you at least 5 business days notice. On termination, we will close out all open contracts we have entered into for you unless you have directed us to transfer those contracts to another participant. 12. DISPUTE RESOLUTION SYSTEM You may advise us of any complaint or dissatisfaction with the service or advice provided to you by us, or you may refer a complaint against us to any appropriate regulatory or other body, including ASX Settlement or the Financial Services Ombudsman. The following dispute resolution procedure is in place to ensure that your enquiries and complaints are handled efficiently. 1. Contact us or our DTR Manager and advise us of your complaint. One of our representatives will attempt to resolve your complaint and will notify you of any proposed resolution. 12 Share Investing Limited ABN , AFSL No Retail Version 4