This post was written in collaboration with FUTU Singapore (FUTU SG). While we are financially compensated by them, we nonetheless strive to maintain our editorial integrity and review products with the same objective lens. We are committed to providing the best recommendations and advice in order for you to make personal financial decisions with confidence. You can view our Editorial Guidelines here.
Options trading — you keep hearing about it from seasoned traders, and you’re keen to try your hand at trading options in Singapore as well. However, as a new trader, you probably have some common questions on your mind:
- What are options and what does trading options mean?
- What happens when you call and put options?
- Where can you trade options in Singapore?
You might also be wondering why people trade options, what are the strategies of trading options, who are the brokers that offer options trading in Singapore, how to get started trading options in Singapore and so on…
We’ve all been there — our first time understanding and trading options as a newbie. We were nervous, to be honest, as options are derivatives, aka not your usual straightforward asset and hence trading them could be riskier than, say, trading plain vanilla stocks and shares. TBH, it’s not something that’s recommended for total beginners.
So when starting, it’s always best to do your own due diligence, do your homework, start small and go slow. Even now, we still continue to do the same for every single trade, because money doesn’t grow on trees (but of course, we sure wish it did).
Let’s break down options trading in this article for you:
What are options?
What exactly are options (we know, we’ve also Googled “options meaning” many times in the beginning) and why trade them? As derivatives, an option’s value is actually dependent on or derived from 1 or more underlying assets, which could be stocks, bonds or even gold.
To simplify the concept for ourselves, we think of options as kinda like a voucher that you pre-purchase. Maybe you buy a discount code for $1, in return for $10 off a minimum spend of $80. Like an option that you trade, the voucher has a bunch of T&Cs, as well as an expiry date. You’d have the option to use this voucher before it expires, but you can also choose not to exercise this option.
Yup, options are contracts that enable you to buy or sell an underlying asset if certain conditions relating to price and timeframe are fulfilled. The option will also indicate the price at which you must buy and sell the asset, as well as the expiry date by which you must exercise the option and effect the purchase or sale.
Do note that as an option buyer, you’re not actually buying the asset, but you’re buying the right to buy or sell the asset should the criteria be fulfilled — and you can choose whether you want to exercise this option.
Why trade options?
Thus, while trading options does carry some risk, options have their own fan base because they’re flexible, can be used as a hedging device to reduce risk, and are preferred over the actual asset as options are more cost-effective.
The flexibility comes with your freedom to exercise the option should you see fit, and some options trading strategies do help with hedging to reduce risk (more on that later). Buying an option is also much cheaper than buying the actual underlying asset, perhaps a fraction of the cost, thus it’s more cost-effective.
While we don’t recommend trading options all the time, it really comes in handy especially if you have an analytical and mathematical mind. Truth be told, the calculations you’d need to do beforehand to ensure that your options trades could turn a profit could be a bit heavy on mental gymnastics for complex strategies.
However, if we’re buying a simple call option (no complex strategy involved), it’s simple enough. We just want to have the option to exercise the contract of purchasing a stock (the underlying asset) at lower than market price so that you can turn a tidy profit. Tip: Start with math practice to calculate your premiums paid versus actual profit so that you can confidently venture into trading options.
What are call vs put options?
A call option enables you to buy the underlying asset at a specific price while a put option lets you sell the underlying asset at a specific price. BUYING call and put options are relatively straightforward, as YOU gain the right to exercise the option.
However, SELLING options are more tricky, because when you sell an option, SOMEONE ELSE has the right to exercise the option, but this time you have an obligation to fulfil the contract on your end.
When applied to an option you’re selling, a call option enables the buyer to buy the underlying financial asset from you at a specific price; while a put option lets the buyer sell the asset to you at a specific price. In both cases, you must fulfil the contract as you’re the seller.
To be honest, we’ve never tried selling options before as we’re a bit scared of commitment. Never do anything you’re not confident about, especially when it comes to trading. However, if you’d like to dip your toes, start small and start slow, like we’ve mentioned before.
What are some common options trading strategies?
Let’s move on to some common options trading strategies, to showcase the beauty of the power of options. There are a ton of strategies traders employ, but some are really extremely chim (technical), so we’ll start with the simpler ones first.
You take a long position on a call, and you make money when the underlying asset rises in value (above the strike price) before the option expiry date. You also limit your loss (the maximum is the premium you paid) and your maximum profit is unlimited.
When traders feel the underlying asset will decrease in value, they buy a long put. The more the prices fall, the more their put option gains value. This strategy limits loss (the maximum is the premium you paid), and the profit potential can be significant (but not unlimited).
You buy at least 100 shares of the underlying asset and sell a call option on those same shares. This helps to “lower” the cost of each share as you earn the option’s premium when you sell the call. When the strike price on the call option you sold is met, you’re obliged to sell away your shares of the underlying asset, but you still make a profit. However, your profit is now slightly higher, thanks to your earnings on the option’s premium when you sold the call.
We’re going into hedging/insurance strategy territory now. In a protective put, you yourself own shares of the underlying asset. But you’re afraid that the volatile market situation could cause short-term declines in the value of the underlying asset, so you can buy a put option on your shares of the underlying asset to protect you against any decline in price during the timeframe. It’s like insurance — you’re able to exercise the right to sell your shares without losing money.
How do I trade options in Singapore?
All this talk about trading options in Singapore, but how do you even begin? Did you know that the option to trade options (geddit?) is not available on the Singapore Exchange (SGX)? This was a major headache for us when we first tried to trade options, luckily there are other ways…
Thus, many traders like us turn to overseas markets such as Hong Kong and the US to trade options, or we go through online/mobile brokers or via trading apps.
How to choose an options trading broker?
This brings us to our next point: How to choose an options trading broker in Singapore?
Well, we’d need to look out for key things, such as fees, exposure, risk management, insights and data. For me, the platform must offer competitive fees to make my trades worth, a good user interface (because I just hate an ugly app) and ease of funding (don’t ask me to write a cheque!), allows us to trade on the go (for those loooong bus rides), plus offers tools and resources to help me along when I’m too busy with #Adulting.
- Min. Commission Fee US Stocks
- Min. Commission Fee SG Stocks
- Min. Funding
One of the options trading platforms that I use is the moomoo trading platform by moomoo inc, a subsidiary of Futu Holdings Limited.
For one, it has tools and resources that help me level up my online options trading know-how, such as an Option Profit and Loss (P&L) diagram that shows single and option combinations and helps me analyse profit and loss strategies (it even provides P/L ranking and P/L for each stock).
With its powerful drawing tools, I can also discover trends and potential opportunities for my own investment strategy. And I like that I can set up customised smart reminders and conditional alerts to automatically notify me when conditions such as price movements, change in indicators and more are met.
The moomoo trading platform comes with an app, so I can use it on the go, and even in bed (or in the loo). Though trading app moomoo was launched in Singapore in March 2021, its parent company FUTU Holdings celebrated its 2nd year of being listed on NASDAQ during moomoo’s launch month in SG. And of course, it’s offered by Futu SG, which is licensed and regulated by the Monetary Authority of Singapore (I wouldn’t ever use a platform that’s not received MAS’ blessing).
I like Futu SG’s competitive fees. It sports low commissions and does away with other charges such as the minimum funding amount, inactivity fee and account opening fee. There’s also no custodian fee and I can use its FUTU SG’s commission calculator to calculate before trading. Here’s the fee schedule too.
Especially for newbie investors who don’t know how to find news on the grapevine, the moomoo trading platform provides access to 24/7 financial news to keep them abreast of the latest global updates and stock price fluctuation analyses. There’s also access to ratings and insights from several professional third-party researchers to help them make comparisons between stocks; and they can view intuitive graphs that show a more direct view of the company’s financial situation.
The star point is moomoo’s in-app social forum where we can stress test our investment ideas with fellow investors via the unique discussion forums feature (partake in discussions and share trading insights with the global investment community of FUTU’s 15 million like-minded investors).
Sign up with moomoo today and you can redeem up to SGD 2,200 & an iPhone 13 You’ll also get 180 days of commission-free trades in selected markets, free real-time quotes for selected markets, and a SGD50 cash coupon.