Options trading is a popular way to invest in the Singaporean market.
If you’re an intermediate options trader in Singapore, there are several advanced techniques you can use to potentially increase your chances of success. In this article, we will go through a recap of what options trading is and present three intermediate Singaporean options trading that you can use. Without further ado, let’s begin.
What is options trading?
Options trading is a form of derivative trading. It involves the buying and selling of contracts that give traders the right, but not the obligation, to buy or sell an asset at a predetermined price and time. While options trading can be risky, it can also provide traders with greater flexibility and potential returns than traditional stock trading.
Below are four Singaporean options trading techniques you may want to try out if you are an intermediate trader with some experience trading options. You should be mindful that these techniques can be rather complex, so you should not expect consistent profits when you use them. This is because the markets are unpredictable, and there is no certainty in trading regardless of your strategy and skill level.
The straddle strategy
The straddle strategy involves buying both a call option and a put option on the same underlying asset at the same strike price and expiration date. This strategy is designed to profit from significant price movements in either direction. With a straddle, you’re not betting on the direction of the market, but rather on the fact that the market will move significantly in one direction or the other.
An example of a straddle
Let’s say you are considering trading stock options on ABC company, and it is about to release its earnings report. You believe the report will cause a larger price movement in the stock, but you are not sure whether this movement will be positive or negative. You therefore decide to employ the straddle.
You purchase both a call option and a put option for the same underlying stock, with the same strike price and expiry date. Let’s say the stock is currently trading at $100 per share, and you purchase both the call and put options with a strike price of $100 and an expiry date one month from now. The call option costs $5 and the put options costs $3, costing you $8 in total per share.
Now, we can consider three different scenarios.
Firstly, if the stock price remains unchanged at $100, both the call and put options may expire worthlessly, and you lose the entire $8 per share because there was no movement. In another case, the stock price may increase to $110 per share. The call option then is worth $10 and the put option expires worthlessly. Subtracting the $8 cost of the options, your net profit is $2 per share. In the third scenario, if the stock price decreases to $90 per share, the put option is now worth $10, and the call option expires worthlessly. Here, subtracting the $8 cost of the options, your net profit is $2 per share.
You can see from here that the straddle strategy allows you to profit regardless of whether the stock price goes up or down, as long as it moves significantly in either direction. However, you can also see that the strategy does require quite a large move in order to be profitable. If the stock price remains relatively unchanged, you will experience a loss from the options expiring worthlessly.
The iron condor strategy
The iron condor is a popular options trading strategy that involves selling both a call spread and a put spread on the same underlying asset. This strategy is designed to profit from a market that is range-bound or experiencing low volatility. The idea is to earn income from the premiums of both options while limiting your potential losses.
An example of an iron condor
Let’s say you are bullish on a particular stock, but you also want to protect yourself against any potential downside risk. This is the perfect time to use the iron condor strategy.
You first identify the strike prices for the call and put options that you will use to create the iron condor spread. Perhaps the stock is trading at $100. In this case, you believe that it will not go below $90 or above $110 in the near term. This gives you a set range.
Within this range, you sell a put option with a strike price of $90 and collect the premium. This gives you the obligation to buy the stock at $90 if it dips below that level. You would also sell a call option with a strike price of $110 and collect the premium. This gives you the obligation to sell the stock at $110 if it rises above that level. Finally, you buy a put option with a strike price of $85 and a call option with a strike price of $115. These two positions help you protect yourself from potential losses.
When you implement this iron condor spread, you limit your potential losses to the premiums paid for the put and call options you purchased. Simultaneously, you allow yourself to profit if the stock market remains within the range of $90 and $110. This strategy is thus useful in a volatile market where you want to limit your downside risk but still want the potential to profit from the stock’s movement.
The butterfly strategy
The butterfly strategy is a limited-risk, limited-profit options trading strategy that involves buying two at-the-money options and selling an out-of-the-money option on the same underlying asset. This strategy is designed to profit from a market that is expected to be range-bound. The butterfly strategy can be particularly effective when trading options on stocks with low volatility.
An example of a butterfly
Let’s say you believe a company’s stock price will remain relatively stable in the short term. It is currently trading at $50, and you decide to use the butterfly strategy.
You first buy one call option at a strike price of $50. Then, you sell two call options with a strike price of $55, and end things off by buying one more call option with a strike price of $60. These options all have the same expiry date.
If the stock price does remain stable, you can let the options expire worthlessly. You lose the premium paid for the options. However, if the stock price moves within the range of $50 and $55, the two short call options will expire worthlessly, but you will profit from the premium received from selling these options. Meanwhile, the long call options you bought at the $50 and $60 strike prices will retain some value due to the move in the market, and you will be able to realise some profit.
If the stock price moves beyond this range unexpectedly, however, you will lose money on the options. This means that if the stock price rises above $60 or falls below $50, you will lose money on the options. Yet, the maximum loss will be limited to the premium you paid for the options. This makes the butterfly a low-risk strategy, at the end of the day.
The bottom line
Options trading can potentially be a lucrative and exciting way to invest in the Singaporean market. As an intermediate options trader, you can use advanced strategies such as the straddle, iron condor, and covered call to increase your chances of success. However, it’s important to remember that options trading involves risk and should only be undertaken by experienced traders who have a solid understanding of the market and the risks involved. By using these intermediate options trading techniques, you can increase your potential returns while managing your risk effectively.