Options are derivative securities that give the right but not the obligation to buy or sell an underlying asset at a fixed price on a specific date in the future. The Singapore Exchange lists equity index futures and options, currency interest rate futures and options, metal futures and options, and energy futures.
Listed options can be traded independently from derivative products such as forwards, futures and swaps. As long as you understand what ‘limited liability’ means when you trade an option contract, you will have no problem trading these products.
You can approach your broker to see if it will enable you to trade listed options. Check with the Trading Accounts Dept of your broker whether they provide these products.
The most common listed option is an index option that tracks a local equity index. There are also currency interest rates, metal, energy options available for trading in Singapore.
Strike prices, or exercise prices, are fixed costs which you buy or sell stock at when exercising your rights under the terms of the contract should you wish to do so. The higher the strike price chosen by market participants, the more valuable the option contract is deemed to be and vice versa. Therefore, when trading a listed option in Singapore, you should choose a favourable strike price for your position.
Listed stock options in Singapore have a bid-ask spread representing the difference between buyers and sellers willing to buy and sell the option contract. The wider the spread is, the more difficult it can be for you to enter or exit your trades at favourable prices. It means that if you want to trade one lot of an option contract, your entry price could vary by $0.10 – $0.20 due to fluctuations in market demand and supply levels of these contracts at different points during market hours.
It would be best to decide whether you are trading index options or current interest rate options on a discretionary basis. Index options have higher volume during market hours, while currency interest rate products have higher volume outside market hours. You can also choose to trade these contracts after the US markets close at 1 am EST daily. It’s when liquidity levels tend to be at their highest as prominent institutional players don’t want to play with fire by scaling into long or short positions against major currencies late at night when they have potentially less information about ongoing events.
When market makers disclose that they do not provide quotes for bid-ask spreads, they do not intend to provide liquidity for option contracts.
It can mean two things:
Firstly, market makers may be unsophisticated and unable to price these products accurately.
Secondly, market makers unable to provide accurate prices for listed options in Singapore can exploit traders by buying or selling at exorbitant prices.
Limit orders enable you to set the maximum price you are willing to pay when entering a position, as well as the minimum price you are ready to accept when exiting your position. You must decide whether it is best for you as an individual trader to place limit orders with increments as low as$0.10 or whether you should place limit orders without specifying an increment.
Your best strategy depends on your analysis of price action for a stock or index over time and how the option contract being traded relates to this underlying movement of a share or index. You can choose a ‘direction’ based approach to predict that market participants will either drive up the price of a given contract, leading it higher by expiry, or push down its value by expiry due to lacklustre market sentiment. Alternatively it is much safer to trade with an online broker, check out Saxo Bank Group today for more info.