SGX or Singapore Exchange options are financial derivatives that allow investors to buy or sell underlying securities at a predetermined price on a specific date. It will enable investors to speculate on future market movements and manage risk exposure. With SGX being one of the leading exchanges in Asia, there is a growing interest in advanced strategies for trading SGX options. This article will discuss advanced techniques for SGX options in Singapore, each focusing on a different aspect of trading.
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Calendar spread
The calendar spread strategy entails purchasing and selling options on the same underlying security but with different expiration dates. This approach is employed when an investor anticipates a near-term rise in volatility while expecting stability in the long run. By buying a near-term option and selling a longer-term option, investors can potentially profit from the increase in volatility without facing significant risks.
One key benefit of this strategy is that it allows investors to take advantage of time decay. As options get closer to their expiration date, their value decreases due to the diminishing possibility of underlying securities reaching the strike price. By selling the longer-term option, investors can collect premiums and reduce their overall cost for buying the near-term option.
However, this strategy also comes with its risks. If volatility does not increase as expected, the investor may face losses from the near-term option expiring worthless while still having to cover the cost of buying the longer-term option. Therefore, it is crucial to carefully analyse market trends and volatility before implementing this strategy.
Iron condor
The iron condor strategy entails simultaneously selling call and put options on a specific security, each with distinct strike prices. This strategy suits markets with low volatility, where investors expect little to no price movement.
The goal of an iron condor is to collect premiums from both options as they expire worthless due to the underlying security’s price remaining within a specific range. For this strategy to be lucrative, the investor must accurately predict the security’s behaviour and choose strike prices that are unlikely to be reached.
However, this strategy also comes with significant risks. The investor may face substantial losses if the underlying security’s price moves beyond the chosen range. Therefore, it is crucial to carefully consider market trends and volatility levels before implementing an iron condor strategy in options trading.
Straddle
The straddle strategy involves buying call and put options on the same underlying security with identical strike prices and expiration dates. This strategy is used when investors expect significant price movement but are still determining the direction.
One key benefit of this strategy is that it allows investors to take advantageof significant price movements regardless of whether the security’s price increases or decreases. The potential for high returns makes this strategy attractive to investors, especially during volatile market conditions.
However, there are significant risks associated with the straddle strategy as well. If the underlying security’s price does not move significantly, both options may expire worthless, resulting in losses for the investor. This strategy requires a substantial investment due to buying two options, making it more suitable for experienced and financially stable investors.
Covered call
The covered call strategy involves buying an underlying security and selling a call option on that same security. This strategy is used when the investor believes the security’s price will remain relatively stable or decrease slightly.
One key benefit of this strategy is that it allows investors to generate income from their portfolio by collecting premiums from selling the call option. If the underlying security price does not increase above the strike price, the investor can keep both the premium and the security.
However, this strategy also comes with risks. If the security’s price increases significantly, the investor may face losses if they sell it at a lower strike price. Therefore, it is crucial to carefully analyse market trends and choose the suitable security for this strategy.
Bull spread
The bull spread strategy involves buying a call option with a lower strike price and selling one with a higher strike price on the same underlying security. This strategy is used when investors expect the security’s price to increase moderately.
One key benefit of this strategy is that it offers limited risk and reward potential. Since both options have different strike prices, the investor can limit their downside risk while potentially earning a potential return if the security’s price increases as expected.
However, there are also potential downsides to this strategy. If the security’s price does not increase as expected, the investor may face losses from both options expiring worthless. This strategy also requires careful consideration of volatility levels and market trends to choose appropriate strike prices.