Traders need to understand the risk factors before trading options in Asia. Knowing the implications of different types of options available will help prevent financial losses.
To start trading options online, there are several things you need to know. First and foremost, the very basics: what options are and how they work.
Option basics in finance
An option is a contract that gives the holder the right but not the obligation to buy or sell an underlying asset at a specified price on or before a specific date. The most common underlying assets include stocks, currencies and commodities such as gold. The specific details of how these contracts work can be complicated for beginners without any previous experience in finance whatsoever.
Options traders typically spend years studying price movements before taking a position on trade. On top of that, different options have their idiosyncrasies that can take even more time to get used to.
Before you start trading options online, you should grasp their function and understand how they work in general. There are many books and websites that can help you learn the basics at your own pace before taking a position on an option.
Follow the news and join online trading communities to keep up to date with trading news. Of course, not every trader starts with a sound understanding of what they’re doing. The most important thing to consider is how much money you want to invest.
Many new traders overestimate how much money they can make from options trading by skimping out on putting up enough capital to take full advantage of each trade. In reality, it’s tough for beginners to get consistent results from this type of investing because there’s no way to guarantee that any given trade will be profitable.
Each trade is a wager that the price of a particular option will rise or fall in relation to another asset. If you want to take full advantage of your position, you have to put up enough capital so that your position can exist on both sides of the market. In finance, this is called having a ‘delta-neutral’ position.
For this type of trading to succeed, you need to have deep pockets and plenty of time to watch over your investment. Otherwise, you’ll likely run out of money before being able to recoup any losses from a bad trade. The same goes for time: the more opportunities you give yourself with each trade, the higher the chance that one will be successful.
Options trading strategies
If you decide that trading options are suitable for you, the next step will be figuring out which type of strategy suits your needs best. There are three basic types of strategies:
- Calls: This type of option gives the holder the right to buy an asset at a specific price within a given period. They’re typically used when traders believe that the value of an asset will increase in the future.
- Puts: A put gives the buyer the right to sell their assets at a specific price by a given date. These are often bought when traders think they can make more money by selling high and buying back later at a lower cost.
- Strangles; A strangle combines both calls and puts them into one instrument. Strangles are typically used by traders to make money when an asset’s price moves quickly. You can buy a strangle with a call and put for the same underlying asset but different strike prices.
Everyone has their unique trading style depending on their risk tolerance, past experiences and goals. Figuring out which type of strategy you prefer will help narrow down your options when picking out individual trades. New traders interested in options trading are advised to use an experienced and reputable online broker from Saxo Bank before starting their investment journey.