Listed options are derivative agreements, allowing the holder to buy or sell an underlying asset at a specified price on or before a specific date. Listed options are traded on exchanges and differ from over-the-counter options in that they are standardised in terms of strike price and expiration date.
Listed options in Singapore work similarly to those traded on other exchanges worldwide. The critical difference is that due to the small size of the Singapore market, there is typically less liquidity for listed options than for their counterparts on more significant exchanges.
Choose an underlying asset
The first step in trading listed options is to choose an underlying asset. The underlying asset can be a stock, index, currency, or commodity.
Select a strike price and expiration date
The next step is to select a strike price and expiration date. The strike price is how much the option holder has the right to pay or sell the underlying asset for. The expiration date is when the option expires and can no longer be traded.
Choose a call or put the option
Once you have chosen an underlying asset, strike price, and expiration date, you must decide whether you want a call or put option. A call option gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset.
Determine the premium
The premium is how much the option contract is worth and comprises two parts: the intrinsic and the time value. The intrinsic value is the difference between the strike price and the current market price of the underlying asset. On the other hand, the time value is the amount by which the premium exceeds the intrinsic value. It reflects the risk that the option will expire worthlessly.
Place your order
Once you have determined the premium, you can place your order with a broker. There are two types of orders: market orders and limit orders. Market orders are executed at the current market price, while limit orders are executed at a specified price.
Monitor your position
Once your order has been placed, you must monitor your position. You can do this by tracking the underlying asset’s price and the premium. If the price of the underlying asset moves in your favour, you will make a profit. If it moves against you, you will incur a loss.
Close your position
After reaching your desired level of profit or loss, you can close your position by selling or buying options contracts. Alternatively, you can let the option expire worthlessly.
Benefits of trading listed options in Singapore
Options provide leverage
Options provide leverage, the ability to control a large amount of the underlying asset with a relatively small amount of capital because options have a lower price than the underlying asset.
You can use options to hedge
You can use options to hedge, which is the process of offsetting the risk of an investment by taking an opposite position in a related asset. For example, if you own shares of a stock, you can purchase a put option to hedge against a decline in the stock price.
Options offer flexibility
Options offer flexibility, which is the ability to tailor your investment to your needs because options come in various expiration dates and strike prices.
You can trade options in a bearish or bullish market
You can trade options in a Bearish market, which is a market where prices are falling because options allow you to profit from a decline in the underlying asset price.
Similarly, you can trade options in a Bullish market, which is a market where prices are rising because options allow you to profit from an increase in the underlying asset price.
Options provide a known risk and reward
Options provide a known risk, the amount you stand to lose if the option expires worthlessly because the premium is the maximum loss you can incur.
Similarly, options provide a known reward, the amount you stand to gain if the option expires in the money because the strike price is the maximum profit you can make.