Options trading is an advanced and expert type of investment where contracts are bought and sold to expect the underlying security to rise or fall in value by a set date. Singapore is a popular destination for options traders given its favourable business environment, access to global markets and liquidity.
There are many different ways to approach option trading strategies, and it would be impossible to cover them all here. There are specific options trading strategies that stand out from the crowd. Singapore traders have chosen these strategies for their ability to create value, regardless of market conditions.
Most popular types of options strategies
Let’s take a look at the options trading strategies Singapore traders are using;
One such strategy is the covered call. This approach involves buying particular security and then selling call options on that security to generate income. In a sense, you’re becoming the option writer: you’re giving somebody else the right to buy your security at a set price, but only up until a certain point in the future. When the stock price falls below the strike price of the call options you wrote, then you’ll still own the underlying stock and can sell it at a higher price than when you bought it. It is an excellent way to create a passive income, provided you time your trades correctly.
Another popular option trading strategy is known as straddling. This approach is similar to hedging in that you’re trying to protect your original investment from potential losses. However, straddling takes things one step further by generating profits from price movements in the underlying security. You can execute a straddle in various ways, but all involve buying put and call options at the same time, hoping either of them will pay out a substantial win.
Stocks with lower volatility make for better options trading opportunities since they have more definitive prices and specific risk profiles. Higher volatility stocks offer greater returns and have a more significant potential for loss. A good rule to follow is to look at how much a single point movement would affect the stock price over three months, as this gives some indication as to whether the stock has high or low volatility.
For example, if XYZ company currently trades at SGD 1 per share and there is strong support at SGD 0.90, a trader may purchase a call option with a strike price of SGD 1.05 expiring in 3 months. If the stock price moves above SGD 1.05 by expiration, the trader makes a profit; if it moves below, the trader loses money.
Other factors to consider when trading options
There are other factors to consider when trading options other than just the underlying asset’s price. In Singapore, these factors may include:
The liquidity of the option
This means how easy it is to buy or sell an option at any given time. The more liquid an option is, the easier it is to trade and vice versa.
The time to expiration of the option
This refers to how long you have before the option expires. The longer the time to expiration, the more time you have for the underlying asset’s price to move in your desired direction.
The implied volatility of the option
This is a measure of how much prices are expected to move in future. It is also used to predict the chance of an option finishing in the money. Generally, if implied volatility is high (above 20%), it may be worth buying options as they will likely be profitable.
There are many different options trading strategies available, but not all of them will be appropriate for every trader. Understanding your risk tolerance and investment goals is essential before choosing a strategy. It is recommended that new investors use a reputable online broker from Saxo bank and try out a demo account before investing their own money. For more information, look here.
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