Learning to take the right option

Thursday 5 August 2004

Q. It was announced last month that some NZ companies would begin to offer option trading. While I realise that such an investment vehicle can be risky if one is not well versed in the strategies and markets available, the fact remains that this form of trading can produce great returns.

My question is: If an average NZ investor traded options regularly, what are the tax implic

By The Landlord

ations? I have heard that because of our country's lack of capital gains tax there would be little tax to pay. Can you shed any light on this?

A. Options on five shares, Carter Holt Harvey, Contact Energy, Fletcher Building, Telecom and The Warehouse, will be traded on the New Zealand Exchange from September 28.

Let's start by understanding what they are. Then we'll look at tax.

There are two types of options, calls and puts. A call option gives you the right to buy, say, 1000 Telecom shares at a fixed ("exercise") price on or before an expiry date.

Let's say you pay 40c a share, or $400, for the option; the exercise price is $6.25, and the expiry date is June 23 next year.

If, before that date, Telecom shares rise above $6.25, you can exercise your option to buy at the then-cheap price.

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