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What is Options Trading?
When thinking about investments and trading, most people refer to stocks and bonds trading. Others have an edge about currencies trading. However, very few people in Singapore, including investors, are aware of options trading.
This is largely because the concept of trading options remains a bit fuzzy among many. But it's, in fact, a very profitable investment if you get a grip on a few of the basic features of options trading.
Below, we look to demystify options trading and help you understand why it's an excellent investment opportunity for Singapore traders.
What are options?
To understand what options trading is, we first have to know what options are. In a nutshell, options are financial contracts that give a buyer or holder the right but not obligation to buy or sell the option’s underlying asset on an agreed date and price.
These assets could be securities like stocks, ETF's, or any other similar products. Once your options contract date matures, the option loses value and ceases to exist. The option's strike price refers to the specified price at which the holder of the options can buy or sell
Types of Options
There are two main types of options traded in the options market, Call option, and Put option.
Call option
The call option is essentially a buy order. It allows the holder to buy a financial asset at the strike price within the specified dates. He/she earns their profits when the price for these assets increase.
Call options can be bought or sold, also known as writing an option’, depending on the market prices. For instance, if a buyer trades the stocks option, a call option allows them to buy ‘x’ number of shares in a company at a specified price, i.e., the strike price, until that option's expiration date.
If they want to profit, the holder should sell that option at the market price before its expiration.
Sell option
The second option, Put option, works almost the same way as the Call option. However, the difference is that Put options grant a buyer the right, but not the obligation, to sell a financial asset at the strike price within the specified dates. The holder earns profits when the price for the assets decreases.
One key thing to note about these two options is their premium. Premium refers to the market price of an options contract at a specific time. When buying a contract, the buyer pays the premium to the seller. This price is subject to change by the day, owing to the volatility of the markets.
So, what are Options trading?
With the understanding of what options are, options trading refers simply to the buying and selling of options contracts.
It mainly occurs in the stock and bonds market as most of the securities, stocks, commodities, bonds, are traded on these platforms. And so, just like with stock trading, you need a reliable broker to venture into the options market.
Why Should you trade options?
While any investment bears with it a significant amount of risk, most investors in Singapore use options trading because it minimizes the risks – compared to stocks.
With the use of leverage, options trading allows you to trade more volumes in the market, with little initial capital. This magnifies your potential profits -- and losses if things go wrong. However, traders can make use of the protective stop to manage their losses.
Options also allow you to hedge your positions in the market for an extended period at relatively low costs. This reduces your exposure to unwelcome risks and helps protect your portfolio.
Additionally, trading options give the holders a lot of flexibility with some cushion against volatility. You can earn from whatever position you're in regardless of how the market moves. So, if it's bullish, you can call and put it when it's bearish—it’s all up to you!
Final Thoughts
Options trading is one of the best ways for Singapore traders to secure and expand their investment portfolio. While learning and understanding its concept may be a bit hard, once you’ve mastered the basic options process, it can quickly become a lucrative venture.
However, as with everything, it still bears the potential to lose. So, while beginning your options trading journey, master how to control your losses.
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