Options trading remains one of the more complicated and misunderstood aspects of investing, particularly in Singapore. With a wide range of options available, it’s no wonder many are unsure about how to best invest in this area. This article covers the most unanswered questions regarding options trading in Singapore for investors wanting to get started.
What is options trading?
The first question investors look into trading options in Singapore is what it actually entails. An option gives the buyer or holder the option, but not obligation, to buy (call) or resell (put) an underlying asset at a predetermined price on or before expiration date. In contrast with traditional stocks and bonds, options give buyers greater leverage over their investments due to its lower cost and higher return potential.
What are the different types of options?
The second question investors have is what type of option to use. Generally, there are three main types of options: American style, European style and exotic options. American-style allows traders to execute their options any time before expiration date while European-style only permits execution on the expiration day itself. Exotic options meanwhile offer unique features such as knock-in or out barriers, binary outcomes and digital payoffs.
What strategies can I use in trading?
Traders must then decide which strategies they should employ when investing with options. Popular strategies include the covered call (buy stock + sell a call) and protective put (buy stock + buy a put) strategies. The former involves the writing of a call option to generate additional income from existing stock positions while the latter is done by buying an out-of-the-money put for portfolio protection against market downturns.
What are the risks associated with options trading?
It’s also important for investors to understand the various risks associated with options trading before getting started. As most options are leveraged investments, they carry greater risk than stocks or bonds and can result in losses that exceed invested capital if not managed properly. Furthermore, time decay (also known as theta) can be a factor when it comes to losing money on expiring options contracts.
How much capital do I need to start trading?
The amount of capital needed for options trading depends on the type of strategy employed. Generally, buying call and put options require less capital compared to strategies such as writing covered calls or protective puts which may involve having enough capital to purchase stocks. Additionally, traders should also consider transaction costs when it comes to trading.
What are good indicators for successful trades?
Technical analysis is often used by options traders in order to determine whether they have a profitable trade opportunity ahead of them. Good indicators include chart patterns such as head-and-shoulders, cup-and-handle formations and double tops/bottoms among others. Trading volume and open interest can also give clues on potential breakout opportunities while support/resistance levels provide further insight into investor sentiment.
What are the taxation implications of options trading?
When it comes to taxes, there are several factors that affect how profits from options trading should be reported. These include whether or not the trader is considered a professional or retail investor and whether their trades have been done on margin or cash account. Understanding these will help ensure traders pay the right amount of tax on any gains made.
How do I find reliable market data?
Options traders also need access to reliable and timely market information in order to make informed decisions. This includes quotes, charts and news related to the underlying assets they’re trading as well as any other relevant economic indicators. Fortunately, Singapore has a number of reputable sources for such information including the Singapore Exchange (SGX) and Bloomberg.
How do I find the best broker for options trading?
The last question traders have is how to find a suitable broker for their needs. A good starting point is to check out online reviews of brokers in Singapore. Factors such as trading fees, account types, supported markets and customer service should also be taken into consideration before making a decision.
The bottom line
Options trading can be an attractive investment option for investors looking to generate income from their portfolios but it’s important to understand all aspects before diving in. With the right knowledge and tools, traders can gain peace of mind knowing that they’re taking informed decisions with regards to their investments.
As always, any decision taken should be based on informed analysis and research. With the right level of understanding, options trading can be a profitable endeavour for investors in Singapore.
