As a novice trader in Singapore, you may be wondering if options trading is suitable for you. After all, there are many different types of financial instruments to choose from, and each has its pros and cons (click to read more). What are the benefits of options trading that make it worth considering?
Options offer a high degree of flexibility.
A high degree of flexibility is one of the critical benefits of options trading. Unlike other financial instruments, you can tailor your trade to suit your risk appetite and investment objectives with options. For example, if you are bullish on a stock, you can buy a call option to profit from a price increase. Or, if you are bearish on a stock, you can buy a put option to profit from a price decline.
Options offer the potential for high returns.
While there’s always risk involved in any trading, the potential for high returns is genuine with options. When done correctly, options provide the opportunity to leverage small movements in the underlying asset price into more enormous profits.
Hedge other investments
Options can be used to hedge other investments, which can help mitigate losses in your portfolio. For example, if you own shares in a company about to release disappointing earnings, you could buy put options on that stock to offset any potential losses.
Options trading is cheaper than buying the underlying asset.
When you trade options, you only pay for the right to purchase or sell the underlying asset at a set price. It means that options trading is generally much cheaper than buying the underlying asset outright.
You never have to exercise your option.
A great thing about options trading is that you never have to exercise your option if you don’t want to. If you buy a call option and the underlying asset’s price never rises above the strike price, you can let the option expire worthlessly. You will only lose the premium that you paid for the option.
Options can be used to generate income, which is another one of the benefits of options trading. There are many different strategies that options traders can use to generate income, such as writing covered calls or selling put options.
It can be traded in a variety of markets.
Options can be traded in various markets, including stocks, currencies, commodities, and indexes, which means plenty of profit opportunities, no matter what’s happening in the world.
Options trading is suitable for all levels of traders.
Whether you’re a novice trader or a seasoned pro, options trading can suit you. Some options strategies can be used by all levels of traders, from the most conservative to the most aggressive.
Options provide leverage
Options provide leverage, which means that you can control a prominent position with relatively small capital. It can magnify your profits, but it can also magnify your losses, so it’s essential to use this tool carefully.
You can trade options around the clock.
Another one of the benefits of options trading is that you can trade them 24 hours a day, 5days a week. It is because options are traded on global exchanges, and there is always someone willing to buy or sell.
Used to speculate
Options can be used to speculate, which means taking a position in the market in the hope of making a profit. It is different from hedging, as you are not trying to offset any losses in your portfolio but are simply aiming to make a profit from price movement.
Options contracts have a set expiry date.
All options contracts have a set expiry date, which is another one of the benefits of options trading. It means that you know exactly when your trade will end, and there is no chance of it being “called away” or otherwise taken away from you before you are ready.