The options trading world can seem daunting and complex, especially for beginners. However, it can be a lucrative investment with the right strategies and knowledge. Options trading in Singapore has gained popularity in recent years due to its potential for high returns and relatively low risk compared to other forms of trading.
One of the key advantages of options trading is the flexibility it offers traders. By buying and selling contracts, investors can potentially profit regardless of whether the market rises or falls. This article will discuss Singapore’s most effective options trading strategies to help you potentially maximise your returns while minimising risks.
Covered call
The covered call strategy is one of Singapore’s most popular and widely used options trading strategies. It involves buying stocks and selling call options on those same stocks. This strategy aims to earn income from the premiums received from selling the call options while still being able to take advantageof any potential increase in the stock’s price.
To implement this strategy, an investor must first buy the underlying stock. Then, they can sell a call option with a strike price above the stock’s current market price. If the stock’s price remains below the strike price until expiration, the investor gets to keep both the premium from selling the call option and their shares of stock.
This strategy is considered relatively low-risk as investors already own the underlying stock, which acts as a safety net if the stock price decreases. However, it does limit potential returns if the stock’s price increases significantly.
Protective put
The protective put strategy is defensive against potential losses in a stock position. It involves buying a put option for stocks that an investor already owns. The put option acts as insurance, protecting the investor’s stock position from any potential downturns in the market.
If the stock price drops below the put option’s strike price, investors can exercise their right to sell their stocks at that price. It limits their losses and allows them to hold onto their stocks until they regain value in the market.
This strategy is beneficial during market volatility or uncertainty, as it can help investors protect their portfolios from significant losses. However, it does come at a cost, as the investor must pay a premium for buying the put option.
Long straddle
The long straddle strategy entails purchasing a call option and a put option for a given stock with identical expiration dates and strike prices. This strategy allows investors to benefit from significant price movements strategically.
If the stock’s price increases significantly, the call option will be lucrative, while if it decreases significantly, the put option will be promising. However, this strategy requires a significant price movement in either direction to be beneficial.
One of the key advantages of this strategy is that it allows investors to take advantageof volatility in the market without having to predict the direction of the stock’s movement. However, it can also be a high-risk strategy, as both options will expire worthless if there is no significant price movement.
When investors buy options in Singapore, they can use the long straddle strategy to take advantage of market volatility while minimising risk.
Iron condor
The iron condor strategy involves simultaneously selling a call spread and a put spread on the same stock. This strategy aims to capitalise on a market that exhibits neutrality, characterised by the stock price staying within a defined range.
To implement this strategy, an investor must sell an out-of-the-money call option and buy a further out-of-the-money call option. At the same time, they must sell an out-of-the-money put option and buy a further out-of-the-money put option on the same stock with the same expiration date.
If the stock’s price remains within the range of both options’ strike prices until expiration, all four options will expire worthless, and the investor gets to keep the premium received from selling them. This strategy is beneficial when there is low volatility in the market.
However, suppose the stock’s price moves significantly outside the range. In that case, it can result in losses for the investor as they are obligated to buy or sell the underlying stock at a more unfavourable price.
Long-term equity anticipation securities (LEAPS)
LEAPS are long-term options contracts with expiration dates up to three years in the future. This strategy benefits investors with a long-term bullish outlook on a particular stock. LEAPS allow investors to control more significant amounts of stock with less capital than buying the actual stocks. They also provide leverage and flexibility, as they can be bought or sold before expiration.
However, LEAPS carry a higher risk than traditional options contracts as they are more expensive and have a more extended expiration date. Researching the underlying stock thoroughly before purchasing LEAPS to minimise potential losses is essential.
Traders can also use LEAPS to implement other strategies, such as the covered call or protective put, with a longer time horizon. It can also hedge against potential losses in an investor’s stock portfolio.
