Options trading in Singapore is now becoming more popular than ever before. Let’s talk about why this is and why you must consider investing in options.
The simplest definition of options trading is buying the option to buy or sell a share at a given price (strike price) before the expiry date. Options trading is like playing chess. The one who wins is the one who can predict and profit from moves made by others(visit the site for more information).
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What are the Options, and how does it work?
An option gives the buyer the right – but not an obligation – to buy/sell shares at a specific strike price before the expiry date. If you think that prices will rise, you will buy call options that give you the right to buy at the strike price. If prices fall, you can sell call options that are obligated.
The buyer of an option does not have to exercise his rights immediately. He can wait till he is ready before buying/selling shares – this is called ‘exercising the option.’
Why would you want to buy an option?
Salary sacrificing for CPF OA or SA
Because of the attractive tax treatment on your savings due to salary, sacrificing has become more popular for employees here in Singapore. Some companies are now using this as a corporate incentive by offering premium trading services with no commission charges. It will save on unnecessary trades and focus on more value-adding services.
Using a Robo-Advisor.
Robo-advisors such as StashAway provide an auto trading investment service that invests in Exchange Traded Funds ( ETFs ) for individuals who lack the time and skills to research stocks. These Robo-advisors have meager management fees, and it’s simple to use their web or mobile app with real-time prices.
Dollar-Cost Averaging
Instead of a lump sum payment at a single point, investors can invest small amounts periodically over a long period. It is known as dollar-cost averaging or DCA for short. Volatility will always exist, but if you invest small amounts over a more extended period, you will tend to buy at market bottoms and average your purchase price.
Special Scenarios
If you are retiring soon or simply looking for investments that do not require much monitoring, then options trading can be helpful. There is no need to monitor prices often as the options expire at the expiry date. Investors may also choose not to exercise their rights, especially if they bought call options, which makes them obligated to purchase shares only when prices rise above the strike price. Instead of exercising his rights, he can just let it expire since he doesn’t have to use cash to buy the underlying shares. He gets this option because brokers usually give investors 30 days before exercising their rights.
Offer Side Analyst
Some brokerage firms are now looking for analysts with good ideas on companies they think will offer good investment opportunities. These individuals need to know how to source information and present them so that brokers can decide whether to recommend them to clients.
How are options priced, and how does it relate to the underlying stocks?
Options are priced based on the potential payoff – what you stand to gain if you were right about your prediction. For example, if an investor buys one call option with a strike price of $1.50 expiring next month, he gains $0.50 per share if prices rise above $2.00 by the expiration date. However, he will lose his entire investment if prices fall to $1.50 or below.
The underlying shares represent the level of exposure. For example, with one call option, you can gain exposure to 100 shares of a particular stock with a market capitalization of $10,000 (100 x $10). For investors who only want exposure to a company’s growth potential and not its price fluctuations, buying options can be more efficient than trading the underlying stocks themselves.
