Getting Started With Options: 3 Things to Know

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You’ve heard about options and you’re keen to start experimenting with them. Or perhaps, you’re just bored of plain vanilla stocks and shares.

Well, first things first. You need to know that options are derivatives. This means their value is actually dependent on or derived from 1 or more underlying assets, which could be stocks, bonds or even gold.

Hence, as options are not your usual straightforward asset, trading them could be riskier — it’s not recommended for beginners.

Risk factors include: 

• Complex: If traders don’t fully understand what they’re trading, they may not be able to identify or manage risks
• Always changing: As they’re derived from the underlying asset, it’s impossible to know an option’s true value
• Speculative nature: You’re not quite sure how the underlying asset(s) will move, especially if you’re a newbie trader
• You could lose all your investment and possibly more (for example, if you forget to exercise the option before the expiry date or make a miscalculation)

Nevertheless, lots of seasoned traders swear by options. These veterans enjoy their flexibility, use it as a hedging device to reduce risk, and prefer to buy options over the actual asset as the former is more cost-effective. We’ll briefly address some common strategies later.

Before you dip your toes into options, here are 3 things to know:

 

1. What are options?

Like its name suggests, options give the buyer the right to make a choice. Unlike plain vanilla stocks and shares, options are contracts that enable you to buy or sell an underlying asset if certain conditions relating to price and timeframe are fulfilled.

Like a contract, 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.

Yup, 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 not to exercise this option.

Options: 2 analogies

Think of it this way: An option is kinda like the Option to Purchase (OTP) stage of buying a HDB flat. You pay for the OTP, but you can always choose to change your mind later (maybe the estate is not right for you and your partner) and forgo the OTP fee.

In a more simplistic sense, you can also think of an option like a voucher that you pre-purchase on Fave or Shopee. For example, I recently bought a FairPrice discount code for $1.99, in return for $12 off a minimum spend of $150 online. The voucher has a bunch of T&Cs, as well as an expiry date. I have the option to use this voucher before it expires, but I can also choose not to use it (maybe I found a supplier who could sell me the same items at a much lower price).

Of course, just like how the OTP and voucher have detailed T&Cs, traders should always check out the “fine print” when they buy or sell options.

You can buy AND sell options

Here’s the tricky part, you can also sell options. When you sell an option, someone has the right to exercise the option, but this time you have an obligation to fulfil the contract on your end.

There are also these terms, “call” and “put”: When applied to an option you’re buying:

• A call option enables you to buy the underlying financial asset
• A put option lets you sell the asset

When applied to an option you’re selling:

• A call option enables the buyer to buy the underlying financial asset from you
• A put option lets the buyer sell the asset to you

In both cases, you’re obligated to fulfil the contract as you’re the seller.

Scenario: Buying an option

An options contract typically comprises 100 shares of the underlying asset, for which the buyer has to pay a premium for each contract. However, the premium for each contract tends to be much lower than what the buyer would pay for the actual underlying asset.

Let’s say you want to buy Netflix (NASDAQ: NFLX) stocks (trading at about US$499 per share), and you feel it will continue to go up in value. Hence, you buy a call option, where you can benefit from an increase in the Netflix stock price.

You buy 1 call option with a strike price of US$510 (price at which the option can be exercised), with an expiry date of 1 month in the future. Say each contract costs US$1.60, so your cash outlay is US$160 (not inclusive of other fees and commissions).

In a month, say Netflix somehow rises to US$515 and you exercise the option to acquire each share at $510 each. After deducting your initial premium per contract, you’d have made US$340 (US$500 profit minus US$160 in premiums).

However, if the Netflix stock price is unable to meet the strike price of US$510 within the expiry date of a month (or even falls below US$499), you’re now US$160 out.

How it’s cost-effective: Those who had bought the actual asset of 100 Netflix shares would need to fork out US$49,900 (compared to your US$160). If the Netflix stock price were to fall to US$490, that person would have made an unrealised loss of US$900 (but they can continue to hold onto it). Meanwhile, the options trader would have lost the US$160 premium (it’s still a loss, nonetheless) but reduced their downside risk.

 

2. What are some common strategies?

There are a plethora of trading strategies employed by options traders, but for simplicity’s sake, we’ll just briefly touch on 4 common strats.

Long calls

When you take a long position on a call, 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.

Long puts

This is for traders who feel the underlying asset will decrease in value. The more the prices fall, the more their put option gains value. This strategy has less risk than that of a typical short-selling strategy as it limits loss (the maximum is the premium you paid), and the profit potential can be significant (but not unlimited).

Covered calls

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, still making a profit. However, your profit is now slightly higher, thanks to your earnings on the option’s premium when you sold the call. 

While this strategy limits your profit to the strike price level, even if the underlying asset shot up in value, you still have some downside protection in the form of your earned option premium. Best case scenario: The underlying asset doesn’t hit the strike price before expiry, allowing you to cleanly pocket the current premium yet continue to sell another call option for another round of premium earnings.

Protective puts

This is a form of hedging/insurance strategy when you own shares of the underlying asset. If you’re afraid that the volatile market situation could cause short-term declines in the value of the underlying asset, you can buy a put option on your shares of the underlying asset.

For example, you decide to buy a protective put that expires in 1 month, where the strike price is the current price of the underlying asset. This protects you against any decline in price during the month — just like insurance (so you’re able to exercise the right to sell your shares without losing money). If the underlying asset increases in value, you don’t exercise the option, but you still gain overall from the increase in value of the underlying asset.

 

3. Where to trade options?

You’re probably wondering where you can trade options, since it’s not available on the Singapore Exchange (SGX). A lot of traders turn to overseas markets such as the US and Hong Kong to trade options, through online/mobile brokers or trading apps.

One of these is Tiger Brokers’ Tiger Trade app, a handy all-in-one multi-asset mobile trading platform specifically tailored to meet all your investing needs… and it fits right in your pocket, so you can trade on the go, wherever you are.

Competitive fees

Tiger Brokers also offers competitive and transparent fees when you trade options on its Tiger Trade platform, from US$0.65 per contract (US) and from 0.2% * trade value (HK) with the fee breakdown of what’s charged by whom. 

Your profits are maximised, because Tiger does NOT charge any of the following: Custody fees, deposit & withdrawal fees, currency exchange fees, inactivity fees and account maintenance fees.

Here’s a look at what Tiger’s fees are (info correct as of 19 July 2021):

 

US Stock Options

Type	Charges	Charged by
Commission	USD 0.65 / ContractMin. USD 1.99 / Order	Tiger Brokers
Platform Fee	USD 0.30 / ContractMin. USD 1 / Order	Tiger Brokers
ORF (Options Regulatory Fee)	USD 0.0388 / Contract	Exchanges1
Trading Fee (Charged for sell orders only)	USD 0.0000051 * Sales Value	SEC (U.S. Securities and Exchange Commission)
FINRA Trading Activity Fee(Charged for sell orders only)	USD 0.002 * Quantity Sold	FINRA (U.S. Financial Industry Regulatory Authority)
OCC Clearing Fee	USD 0.055 / ContractMax. USD 55 / Order	OCC (U.S. Options Clearing Corporation)
Exchange fee	Exchange fees vary depending on the exchangein which the contract is executed	Exchanges2

1. The following exchanges charge ORF: AMEX, BATS, BOX, CBOE, CBOE2, ISE, GEMINI, MIAX, NOM, PCX and PHLX, which may be subject to change.
2. Options trading fees charged by exchanges may vary as the impact of orders on options liquidity varies. The exact fees are subject to the exchanges.

Notes:
(1) If there is any change in the fees charged by third parties such as exchanges and regulators, Tiger Brokers will adjust the fees it charges on their behalf accordingly.
(2) Singapore government will levy a GST (Goods and Services Tax) at a rate of 7% on the above “Commission”, “Platform Fee”, “ORF”, “Trading Fee”, “FINRA Trading Activity Fee”, “OCC Clearing Fee” and “Exchange Fee”.

 

Hong Kong Stock Options — Trading Fees

Type	Charges	Charged by
Commission	0.2% * Trade ValueMin. HKD 3 / Order	Tiger Brokers
Platform Fee	HKD 15 / Order	Tiger Brokers
Exchange Trading Fee1	Tier 1: HKD 3 / ContractTier 2: HKD 1 / ContractTier 3: HKD 0.5 / Contract	HKEX

1. For more information about the options tiers, please refer to HKEX website.

Notes:
(1) Singapore government will levy a GST (Goods and Services Tax) at a rate of 7% on the above “Commission”, “Platform Fee” and “Exchange Trading Fee”.

 

Hong Kong Stock Options — Exercise Fees

Type	Charges	Charged by
Commission	0.03% * Exercise ValueMin. HKD 15 / Order	Tiger Brokers
Platform Fee	0.03% * Exercise Value	Tiger Brokers
Exercise Fee	HKD 2 / Contract	HKEX
Trading Fee	0.005% * Exercise Value + HKD 0.5	HKEX
Clearing Fee	0.002% * Exercise ValueMin. HKD 2 and Max. HKD 100 / Order	HKSCC
Transaction Levy	0.0027% * Exercise Value	SFC
Stamp Duty	0.1% * Exercise Value(Rounding up to the nearest integer)	Government of Hong Kong

Notes:
(1) Singapore government will levy a GST (Goods and Services Tax) at a rate of 7% on the above “Commission”, “Platform Fee”, “Trading Fee” and “Clearing Fee”.

 

With Tiger Brokers’ Tiger Trade app, you can easily trade options and more from various global markets for diversification. These include Hong Kong Warrants & CBBCs, Futures, Australian stocks, China A-shares, Singapore stocks, ETFs, REITs and DLCs, Hong Kong stocks, as well as US stocks and ETFs.

You can also access public funds from world-renowned custodians with a wide range of fund categories such as money funds, bond funds and equity funds, via Tiger Brokers’ Fund Mall, available within the app.

Other features include:

• Complimentary real-time stock quotes
• One-click trading
• Profit and loss analysis
• In-depth analytics
• Screeners and candlestick charts
• Financial information on company stocks
• Global news and economic calendar

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 Sign up for Tiger Brokers via our MoneySmart link by 31 July 2021, and receive 1 free Apple share. 

 

 

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