The options market in Singapore is one of the most popular forms of trading, yet still very underdeveloped. This leaves much room for growth over the next few years.
Traders can use many different strategies to increase returns when trading the options market in Singapore. For instance, using an option’s price decay to your advantage by selling Weekly Options with low volatility rather than buying them.
The two main types of options are puts and calls. The former gives the buyer the right to sell an asset at a specified price within a specific period, while the latter gives buyers the right to buy an asset at a specific price before that time has elapsed.
The basics of put option buying
You buy puts when you expect prices to fall in value over time – meaning that you will be able to buy at a lower price than what you originally paid for. A perfect example would be the protective put strategy, where businesses purchase puts to hedge against the downside risk of their stocks.
If the option expires with the asset worth less than its original value, you can exercise your rights and demand that the seller hand over their stock for the agreed-upon price. If not, then your only loss is the premium that you paid upfront, which essentially makes this sort of investment completely free of risk.
The basics of call option buying
As previously mentioned, calls are used when an investor expects prices to rise over time. For example, if you expect Google’s stock price to hit $500 within the next six months, then you might want to purchase a call option with a strike price of $475. If Google hits its target before the option expires, then you can use it to buy shares at $475 even though they’re currently trading for $500. This would allow you to pocket the difference as pure profit.
Calls are also helpful when trying to mitigate your losses – if prices fall below what they were when you bought the call, the option will expire worthlessly, and all that you’ve lost is some time value. After all, time is always working against options holders.
Buy out-of-the-money calls and puts
Another strategy for trading the options market in Singapore is buying out-of-the-money calls and putting a high time decay over two weeks. This creates a situation where you can “buy time” by gaining control of other people’s options who may not have attended to them yet due to busy schedules etc. However, there are risks associated with this strategy, too, as it could be possible that no one else sells their option allowing your own to expire worthlessly or at least lose most of its value.
Selling out-the-money calls and puts.
Another good strategy for trading the options market in Singapore is selling out-the-money calls and putting with one week left till expiration when volatility is high. This creates a situation where you can “sell time”, allowing other people’s option’s price to decrease over a week, but also puts your position at risk if there is a sudden jump in volatility or substantial changes in the stock price (due to news, etc.)
Advanced Option Trading Strategies
While both puts and calls have straightforward usages, traders can use more complex strategies in certain situations. The most common include:
• Straddles and strangles
• Butterflies and iron butterflies
• Bull and bear spreads
• Diagonal spreads
Traders can use many different strategies to trade an options contract successfully in Singapore. However, you must assess each of the pros and cons before choosing which one would be most profitable or least risky for you and your investments. Before investing their money, new traders should use an experienced online broker like Saxo Bank.