One of the most common ways to trade in financial markets is buying and selling stocks. When the price of a stock goes up, you make money, and when it goes down, you lose money.
People can trade in other kinds of securities, like options and warrants. Options give you the right (but not obligation) to buy or sell a particular security at a specific time for a certain price; At the same time, contracts allow you to purchase stock in another company at a fixed price before the option date.
Options can provide an alternative to trading stocks and futures. By far, the most common option traded is the call option – giving you the right but not obligation to purchase a stock or index at a specific price set by contract. No matter how volatile the market may be, you are only required to put down some of your capital as margin when purchasing options, making it easy for many traders new to options to get started.
Options and warrants can be traded over-the-counter (OTC), meaning they aren’t listed on an official exchange such as SGX Mainboard or Catalist board. However, some options are listed over exchanges, called “listed options”, check this here.
This article will give you some tips on starting trading options in Singapore.
1) Find out if your brokerage account allows for option trading
Your stockbroker must offer the service of being able to buy and sell listed options before you even think about starting options trading. Check with them beforehand. If not, explore other brokers until you find one who offers this service. If they do not, consider choosing another form of security to trade in or another entirely investing method.
2) Decide which type of options contract you’d like to trade-in
There are two types of contracts: calls and puts. A call is an option contract that gives the buyer the right to purchase the underlying security at a fixed price on or before an expiration date. A put is an option contract that gives the buyer the right, but not the obligation, to sell an underlying security at a fixed price on or before an expiration date.
Each option has different strike prices and expiration dates, known as “exercise” or “strike” prices and times, respectively. The exercise price is the set price per share of securities traded if the option is exercised; At the same time, time refers to when exactly you can buy or sell these contracts – whether it’s during market hours (8:30 am-4:00 pm) or outside regular trading hours (including overnight).
Generally speaking, people who are more likely to forecast gains are more likely to choose call options. In contrast, people who are more likely to predict smaller gains or losses are typically attracted towards put options.
3) Study the Market Price of Options
The market price is how much one option contract costs at any given time. There are two kinds of pricing models: intrinsic value and time value. Intrinsic value refers to the amount that a call option’s strike price is above the security’s market price; In contrast, time value refers to the amount that a call option’s premium exceeds its intrinsic value. Since you can’t trade an individual stock over SGX, you’ll have to determine if your option is in-the-money, at-the-money, on-the-money etc., by looking up its price.
4) Learn to Calculate Risk
Options trading is much riskier than buying or selling stocks because you can lose far more money very quickly (or gain it faster). It’s because the risk of losing the entire value of your option contract is theoretically infinite. Still, at the same time, you also have an unlimited amount of potential for profit if your prediction proves correct.
If you’re still keen on trading options after considering this information, pick one type of option (either calls or puts), learn how to calculate its intrinsic and time values, and try it out today! Good luck!