Listed options trading 101: An Introduction
Options trading in Singapore has become increasingly popular because of its potential for significant returns and low risk. Options trading is the buying and selling contracts that give the right to trade an asset at a pre-determined price on or before a specific date. It can speculate on the market direction or hedge against risk.
Put and call options
Options are divided into two types; calls and puts. A call option allows you to buy an underlying asset at a pre-determined strike price by a specific expiration date. If the share price rises above this strike price before expiration, then the option will be “in the money”, and you can exercise your option to buy shares of stock at a discount.
On the other hand, a put option gives you the right to sell an underlying asset at a pre-determined strike price by a specific expiration date. If the share price falls below this strike price before expiration, the option will be “in the money”, and you can exercise your option to sell shares of stock at a premium.
Understand the risks
Options trading is unsuitable for all investors due to its high-risk nature. Before investing in options, it is essential to understand implied volatility, time decay and delta. Implied volatility measures how much movement is expected in an underlying asset’s price over time.
Time decay measures how quickly an option’s value can erode or increase over time as expiration approaches. Delta measures how much the option’s price will move relative to a single point in the underlying asset’s price.
Options strategies
As with any investment, various strategies can be used when trading options. These include buying and writing calls or puts, covered calls, protective puts, married puts and collar trades. Buying and writing calls or puts is the most basic form of options trading, which involves buying or selling call/put contracts to speculate on market direction.
Covered calls involve holding a long position in an underlying asset while writing (selling) call contracts against it. A protective put involves simultaneously holding a long position in an underlying asset and buying put contracts against it to protect against losses as prices fall.
Married puts involve simultaneously holding a long position in an underlying asset and buying put contracts against it to increase leverage. Finally, collar trades involve holding a long position in an underlying asset, writing call contracts against it and buying put contracts to protect against losses.
Use a reputable broker before investing in listed options
Using a reputable broker before investing in listed options can incredibly benefit investors. A good broker will provide valuable advice and guidance to help you make informed investment and trading decisions. They can also provide access to sophisticated tools that can give you an edge when trading options, such as charting software, real-time quotes and market news.
A Saxo Capital Markets Singapore broker will also offer competitive fees and commissions on trades, allowing you to maximise your profits with minimal costs. Additionally, brokers have access to research reports from various sources, which could give you insight into the performance of certain stocks or indices that may not be readily available elsewhere.
Finally, using a reputable broker means having someone knowledgeable about the markets and knowing how to manage risk to protect your capital while maximising returns. Brokers are trained professionals who understand what it takes to succeed in this highly volatile environment. They’ll work closely with you so that together, you can develop sound strategies explicitly tailored to your unique needs as an investor.
Using a reputable broker before investing in listed options provides numerous advantages, including expert advice on investment decisions; access to sophisticated tools; competitive fees; comprehensive research reports; and professional management of risks associated with this highly volatile type of investment. Ultimately, these advantages can improve your chances of success and maximise your profits when trading listed options.
Conclusion
Options trading can be a powerful tool for investors looking to profit from market movements. However, it is essential to understand the risks and strategies associated with options before investing. You can become a successful options trader by understanding implied volatility, time decay and delta and utilising various strategies such as buying/selling calls or puts, covered calls, protective puts, married puts, and collar trades.