Trade on an options exchange

Trade on an options exchange

Listed options are standardised options contracts that trade on an options exchange, such as the CBOT. They are among the most popular, and complex, financial derivatives commonly dealt in by retail traders. Like all options, listed options are financial contracts that give the holder the right, but not the obligation, to buy or sell a particular underlying asset at a predetermined price and date. In Singapore, listed options are traded on the Singapore Exchange (SGX), which is a leading Asian exchange that offers a wide range of products, including stocks, bonds, futures, and options. Trading volumes on the SGX, like other exchanges, are dominated by major institutional players, who execute trades at orders of magnitude above the size of the typical retail trade. This is an important point for prospective options traders to bear in mind – they will be the smallest fish in a very big pond. If you do decide to jump into the world of listed options trading, you need to understand both the products, their payoffs and underlyings, and some specific risk management concerns.

One popular listed option in Singapore takes the Straits Times Index (STI) as an underlying. The price of the contract is then based on the performance of the STI, a benchmark index that tracks the performance of the top 30 companies listed on the SGX. STI options allow investors to speculate on the direction of the index, as well as to hedge against potential losses in their equity portfolios. The STI options are available in two forms: European-style and American-style. The former can only be exercised on the expiration date, while the latter can be exercised at any time before the expiration date. The vast majority of executed options are European style, and standard discussions of options trading assume you are dealing with European options. There also exists Asian options, which are a sort of cross between the two styles where the option can be exercised only on specific dates, but offering a range of dates up until the final expiry date where this is possible.

There are several other listed option underlyings that are popular in Singapore: those based on the Nikkei index, the Hang Seng, and other equity indexes are among the most important. Also, given the global dominance of the American equity market, listed options taking the S&P500 as underlying, or even individual US stocks, are extremely common.

Both individual stocks and exchange-traded funds (ETFs) are common underlyings for listed options in Singapore. Investors can buy call options on stocks they believe will increase in value, or put options on stocks they believe will decrease in value. Options also allow the flexibility of trading both calls and puts in either direction; by selling (or ‘writing’) a call option, the trader can share in a downward price move using the same contract. Each of the four potential options – buy call, write call, buy put, write put – has a unique payout structure dependent on the premium received (when writing) or paid (when buying). This allows for maximum flexibility when dealing with volatility. Unfortunately, it also makes predicting options payouts ruthlessly complicated.

The volatility seen by individual stocks is attractive for some options traders, but for those who require a broader base for their underlying, ETF options are an interesting alternative. These options allow investors to trade on the performance of a basket of securities, rather than on a single stock or index, and therefore typically see less volatility. Depending on your trading style, that may be a good or bad thing, as options traders tend to be ‘long volatility’, but when it comes to hedging risks in an existing ETF retirement portfolio, this is a powerful tool.

To buy options in Singapore, retail traders need to be aware of several factors. First, options are complex financial instruments that require a certain level of knowledge and experience to understand. Traders must be familiar with the basic terminology and mechanics of options trading, including strike price, expiration date, and premium. They must also understand the price action of their chosen underlying, as it is impossible to express a view on the future price or volatility of an asset if you do not understand how its market functions.

Secondly, traders should be aware of the risks associated with options trading. While options offer the potential for high returns, they also come with a high level of risk, especially when traded with significant leverage. Traders can lose their entire investment if the option expires out of the money, or if the underlying asset moves in the opposite direction of their trade. It is possible to resell an option that starts to move in the wrong direction, and like with spot trading, options dealers need to have a stop loss in place where they will quit the trade no matter what.

Lastly, traders should carefully consider their trading strategies and risk management techniques, including position sizing, stop loss placement, and looking at technical charts. Options trading can be used for both speculation or hedging, but traders should have a clear understanding of their goals and risk tolerance before entering any trades. Traders using options as a hedge can still benefit from timing their market movements, but if you have to buy the options to protect your open positions you will eventually be forced to execute at any price. Remember other options for hedging exist, including more traditional methods such as buying bonds or gold. Sometimes the simplest solution really is best.

Listed options are a popular trading product for Singaporean investors that offers investors exposure to a wide range of markets, and great flexibility in payout structure. However, options trading is a complex and risky activity that requires careful consideration of trading strategies and risk management techniques. Retail traders should be aware of the risks and complexities of options trading before entering any trades, and should seek the advice of a trusted financial professional if they have any doubt. For most trading strategies, options are an unnecessarily complex method for accessing the markets, but they still have an important place in the financial markets, and cannot be ignored.

About the Author: ryan

You might like