In fact, it has become more popular in Singapore ever since after the 1990s. There are even seminars on options trading held in Singapore almost every day.
Psst, hey...looking to become a profitable investor even without knowing anything about finance?: Grab this free guide to Value Investing that has step by step strategies, real life case studies to help you make more money and build a passive income through the stock market
However, even with its popularity, many would still regard it as a risky endeavour. But there is no need to fret. If you are planning to trade options in Singapore but don’t know how to get a jump start with it, then you are just in the right place.
We have listed below 5 helpful things you need to know before you start trading options in Singapore.
But before anything else, let us first define what options are:
Investopedia defines option as:
“a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price during a certain period of time or on a specific date.”
In simple terms, an option is a contract that allows the buyer to hedge against the risk of prices movement of the underlying asset. Traders , on the other hands, use options to speculate the prices and make a profit should they being right.
Here are two more terms to help you understand options more:
Call options provide the buyer an option to buy stock at a certain price—which would make the buyer want the stock to increase. On the other hand, the option writer/trader would want the opposite to happen.
In cases where the stock does goes up, the trader is obliged—under contractual obligation—to provide the underlying shares most especially when the stock’s market price exceeds the strike.
Contrastingly to call option, put option gives the buyer the option to sell stock at a certain price. In order to gain, the buyer would want the stock to go down. Likewise, the put option writers would want the opposite.
This especially applies when the underlying market price of the stock will fall below the specified strike price on or before the specified date written in the contract.
Now that we have that covered, let us now move on to the 5 things you need to know about trading options in Singapore:
5 Things to Know Before Trading Options in Singapore
#1 Be Wary of Unregulated Online Trading Platforms
Usually, newbies fall trap into signing up for Foreign Exchange or Forex trading seminars on unregulated online trading platforms. And we can’t blame you; what with the “get rich quick” advertisements and their claims of having 100% return trading options.
However, instead of believing, you must take these as red flags.
One reason for that is how the options trading world is very dynamic. Nothing can be set to stone. Those who claim to make complete success with their returns are definitely lying. In one success out of ten trades, the other 9 failed.
Trading with unregulated online platforms puts you out of the protection of laws and regulations made by the MAS or the Monetary Authority of Singapore to safeguard investors. Continuing to do so will make you very vulnerable to scams and other difficulties such as contacting or resolving any grievances.
On the other hand, regulated financial institutions online are subject to regulations that protect investors’ money and assets. Furthermore, these institutions are required to maintain segregated customers accounts, controls, and records.
So as an investor, you are strongly encouraged to only deal with those financial institutions regulated by MAS.
#2 Be Wary of Binary Options
In line with the first point, unregulated online trading platforms offer another form of investment instrument that you must also be wary of: binary options. Binary option is a type of option that references an underlying instrument.
This instrument can be in a form of asset classes like stocks, commodities, currencies, and interest rates.
The returns of this kind of options are dependent on the instrument. If the threshold amount is exceeded, then there will be payment received. On the other hand, if the threshold is not met, then there will be no payment at all.
While it is true that binary options may provide the potential for high profits, it could also give you a significant amount of loss.
Always be skeptical when unregulated platform providers advertise binary options as “trading with zero risk”, “trading amounts of as little as $1”, and “profit payout of 500% per trade”.
These could be an indication that these platforms could be based outside Singapore which are the most unlikely to recover you any amount of money lost.
#3 Singapore Uses Warrants Instead of Listed Options for Trading
Singapore uses warrants as an options trading tool instead of listed options. It is the country’s market equivalent to the standardized equity options or standardized stock options.
Like options, warrants are contracts between the issuer and the investor that allows the investor the right but not the obligation to buy or sell the underlying stock at a fixed price during expiration.
They are securitized so that they can be traded like a stock in a derivatives exchange.
Warrants and Options also work the same way when it comes to call and put. However, they also differ in a lot of ways.
Here is a list of the main differences between structured warrants and standardized stock options, as listed by OptionTradingPedia.com:
Standardized Stock Options
Defined by issuer
Standardized by exchange
Cannot be freely shorted
Can be shorted
Only those issued
Usually a lot more strike prices and expiration
Delivered by issuer
Delivered by investors
#4 There is Not Much Difference Between Options in Singapore and Options in US
Options listed in Singapore are not much different from those listed in the US. At the onset, an option is simply a derivative base on an underlying instrument. There is no difference.
However, the only thing that contrasts the two is the size of their markets. The US market is wider and deeper. So there is a lot of liquidity.
There are also options listed available in US stocks. This provides a wider selection of trading choices for traders.
#5 Many Option Traders in Singapore Exclusively Trade in the US
Since the rise of popularization of online platforms in trading, more and more online options trading brokers accept Singaporean accounts. As a result, options trading in the US market have become more accessible to traders in Singapore.
Singaporean could now directly conduct options trading in the US market which is more convenient to them in terms of having their money wired to and from their accounts.
The most important reason why Singaporeans do this is that the US market is the biggest and provides more liquid options in the world. Therefore, there are more trading opportunities and grants exposure to international blue chips.
Furthermore, the US Market’s standardized stock options comes with a lot more strike prices across more expiration dates.