Options trading is a popular form of investing that allows investors to take advantage of short-term market moves and potentially make big profits. As more people become interested in options trading, it is essential to understand what options are, how they work, and who can benefit from them.
This article will provide readers with an overview of the basics of options trading in Singapore so that they can decide if it is an appropriate investment strategy for them.
What are options?
An option is a contract between two parties where one party (the buyer) has the right but not the obligation to buy or sell something at a specified price within a specific period. Options are often used to speculate on the direction of a stock price or index and hedge against potential losses.
Options come in two varieties: calls and puts. A call option gives the buyer the right to buy a certain amount of an underlying asset at a fixed strike price on or before the option’s expiration date. A put option, on the other hand, gives the buyer the right to sell a certain amount of an underlying asset at a fixed strike price on or before the option’s expiration date.
How do options work?
The buyer of an option pays the seller (also known as the writer) a fee called a premium for the right, but not an obligation to buy or sell something at a specified price within a specific period. The buyer has three main choices:
- They can exercise their option and deliver what they have bought or sold.
- They can let it expire if they don’t want to take any action.
- They can also close out their position by selling it back to another investor before expiry. At expiration, if the option is in the money (the strike price is lower than the stock’s market price), it will be automatically exercised.
When trading options in Singapore, investors must be aware of the Singapore Exchange Derivatives Trading Limited (SGX-DT), the only authorised exchange in Singapore. In addition, investors should be aware of the various types of options trading offered by SGX-DT, such as American and European styles.
Who can benefit from options trading in Singapore?
Options trading is suitable for experienced traders who understand the fundamentals of stock markets and have experience analysing market data. Those new to investing or just starting with options trading should only dive deep into this form after getting sufficient information beforehand. Options trading could benefit short-term traders looking to profit from short-term market moves while minimising risks.
Beginner traders should consider using an online trading platform such as home.saxo to get started as they provide access to numerous resources and brokers that can guide you through your trades.
The Advantages and Disadvantages of options trading in Singapore
Options trading has both advantages and disadvantages. The primary advantage of options trading is that it allows investors to take advantage of short-term market moves without committing a large amount of capital. In addition, options are versatile instruments and can be used for different strategies ranging from speculative to hedging.
On the other hand, one disadvantage is the time decay factor. With shorter expiration dates, the value of an option will decrease over time, even if the underlying asset does not move. Another disadvantage is that novice investors do not easily understand options, and it takes some time to learn the basics before investing. Finally, options are subject to margin requirements and require a higher degree of risk management.
Risks of Options Trading
Options trading can be a highly rewarding investment strategy, but it is not without risks. Before engaging in options trading, it is essential to understand the potential risks involved. In this section, we will explore the different types of risks associated with options trading.
1. Market Risk
Market risk is a primary risk associated with options trading. It refers to the uncertainty of the underlying asset’s price, which may lead to potential losses. Since options trading involves speculating on the price movements of an asset, any changes in the market’s conditions can significantly affect the value of an option.
2. Volatility Risk
Volatility risk is the risk of unexpected and extreme changes in the price of the underlying asset. A high level of volatility can cause the price of an option to fluctuate, leading to potential losses. Options traders need to be aware of the volatility of the underlying asset, as it can significantly impact their investment returns.
3. Time Decay Risk
Time decay risk is another risk associated with options trading. This risk arises from the fact that options have a fixed expiration date. As the expiration date approaches, the value of an option may decrease. Therefore, traders need to be aware of the impact of time decay on their options trading investments.
4. Liquidity Risk
Liquidity risk refers to the potential difficulty in buying or selling an option at a fair price. If an option is illiquid, traders may not be able to buy or sell it at a fair price, leading to potential losses. Traders need to be aware of the liquidity of the underlying asset they are trading in and ensure that they can buy and sell their options at a fair price.
5. Margin Risk
Margin risk refers to the potential losses that traders may face when using margin-to-trade options. Margin is the amount of money that traders must deposit with their brokers to trade options. If the underlying asset’s price moves against the trader, margin calls may be triggered, requiring them to deposit additional funds. If the trader is unable to meet the margin calls, their positions may be liquidated at a loss.
With that said
Options trading in Singapore provides investors with a way to make big profits from short-term market movements while minimising their risk exposure at the same time. However, before taking part in this type of investing, investors must understand the fundamentals of options trading and the associated tools and strategies. With sufficient information and knowledge, investors can make informed decisions on whether or not this form of investing suits them.
Overall, options trading in Singapore provides an opportunity for those willing to take risks and have a deeper understanding of the stock market. If done correctly, it can be a great way to diversify one’s portfolio and generate additional profits. However, investors must research thoroughly before venturing into options trading in Singapore to make informed decisions on whether or not it is a suitable investment strategy for them.
