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Options trading will boom in 2022, with 10.3 billion put and call contracts traded annually. It was the third year in a row that options trading volume increased, more than doubling compared to 2019 prior to COVID-19.
Given its importance and increasing liquidity in financial markets, both investors and traders can benefit from buying and selling option contracts. Partially fueling this surge in trading are certain key features of trading options contracts.
First, the market can be traded in both directions whether the price rises or falls. You can also buy or sell option contracts (put or call) and take both sides of the trade. Finally, the barriers to investment are low as you can increase trading leverage with a relatively small investment capital.
Another factor that may encourage more retail investors to use options is the entry of several reputable online brokerages, including moomoo SG. In addition to very competitive commission rates (moomoo’s brokerage fee for options trading is US$0.65 per contract, minimum US$0.99 per order), the online brokerage is also committed to options trading education.
When trading options contracts, you should familiarize yourself with the options trading tools and features provided by your brokerage firm. We use the moomoo SG mobile trading app, but other mobile trading apps should have similar procedures and tools.
Also read: A beginner’s guide to starting options trading in Singapore
#1 real-time options chain with customizable filters
When trading options, you should be familiar with how to read the options chain. This will give you some information about the option contract you are about to trade. For example: 1) display of both call and put options, 2) option contract expiry date, 3) option contract latest price and current bid/ask price. , and 4) various strike prices for the underlying counters. Our trading platform also allows you to view more technical indicators and toggle details for individual options contracts.
To navigate to the Options Chain screen, simply select the counter you wish to trade your options contract on and click on the “Options” tab.
Source: All screen grabs in this article are from the moomoo SG mobile trading app.
In the example above, we can see that Tesla is currently trading at $143.890 USD (as of January 25, 2023). You can buy or sell put or call options depending on which direction Tesla stock moves. You must also select an expiration date.
Assuming you expect Tesla’s stock price to rise above US$150 (or about 5%) next month, you may choose to buy a call option that expires on February 24, 2023. How high will Tesla stock go? If Tesla’s stock doesn’t exceed $150, or worse, it crashes, you don’t need to buy the stock. This offer requires a fee of approximately US$9.03 per share, or US$930 for a minimum option contract of 100 shares.
Alternatively, you can sell the put option. That means you should buy Tesla stock (if it falls below the strike price). This is especially ideal if you are looking to build a position in Tesla stock. When you sell puts, you generate income (income that the option contract buyer must pay). Based on the screengrab above, we believe Tesla’s stock price will rise, so we choose to sell the put option with a strike price of $142 USD (or slightly above or below current Tesla stock price). can. Receives about US$1,025, but must buy Tesla stock no matter how far below his US$142.
#2 Option Price Calculator
An option chain gives a good idea of the current trading price of an option. Nevertheless, there are more scientific methods for determining the fair value of options.
Those of you who have studied economics in college or chosen a related module may recall that one way to do this is with the Black-Scholes model.
That’s the formula for that.
Luckily, you can use moomoo’s Price Calculator to derive the theoretical price of an option. You can access moomoo’s pricing calculator by selecting a quote for a particular option contract and scrolling down.
Using Tesla stock again, we can see that a call option with a strike price of $150 has a theoretical price of $7.832 and is currently about 13% higher.
It is an indicator of how far or close the current options contract is from the theoretical price at which it is traded. You can also change parameters such as the date and the risk-free interest rate (note that the default is set to 1%) to estimate the price movement of the option contract.
#3 Option Volatility Analysis
Volatility refers to changes in the market price of the underlying asset. Through moomoo’s volatility analysis tool, you can view the relationship between implied volatility (IV) and historical volatility of option contracts. To navigate to this tool, click on a quote for a specific option contract,[分析]Select a tab.
An option contract’s implied volatility indicates how much its price may change in the future. High implied volatility for an option contract means that the market expects large price movements (either up or down) in the future.
As you can see in the screengrab, Tesla’s implied volatility (blue line) is lower than its 30-day historical volatility (orange line). Therefore, the market may be expecting Tesla’s share price volatility to be lower than his 30-day historical volatility.
In general, the lower the implied volatility, the lower the option contract premium should be.
#4 Optional P/L Analysis
When trading options, it is important to know what is at stake (i.e. maximum profit, maximum loss, break-even point) and consider your strategy for specific options trading. An options profit and loss calculator helps you analyze your trades before you place them.
To navigate to this tool, click on a quote for a specific option contract,[分析]Select a tab. To see the P/L Analysis, you’ll need to scroll down (from the Volatility Analysis Tool above).
If you buy a Tesla call option with a strike price of USD 150 (graph above), you know that Tesla should trade at USD 159.15 on February 24, 2023.
Tesla could trade above US$150, but would have suffered a loss as she had to pay US$915 to buy the call option in the first place. Nonetheless, we can also see that losses start to narrow once Tesla shares trade above his $150 strike price. This means that you can consider exercising the call option even though you are still losing money overall.
You can analyze different profit and loss calculations depending on the exact option contract you want to trade.
Also read: moomoo Cash Plus: How to Earn Higher Returns While Investing
Trading options help hedge volatility
Although options trading volume has surged to record levels, it can still be relatively complicated for some retail investors. Rather than choosing to avoid it, you can emphasize understanding it and making better use of the option as part of your overall trading/investing strategy.
Options can be traded not only for short-term gains, but also to protect your long-term investment portfolio. During periods of high volatility (which we are experiencing today), options can be used to hedge long-term positions in the stock market.
If you believe in a long-term growth trajectory but currently own Tesla stock because you are concerned about short-term volatility, you can hedge your portfolio. Buying a put option allows you to limit your downside risk (that is, you can sell Tesla stock at the set price) by paying a small premium.
At the same time, Tesla’s share price is already up nearly 33% in the first 25 days of the year, so it will continue to enjoy further upside potential.
You can start buying and selling both put and call options with moomoo, which offers low brokerage fees and a wide range of options trading tools. Plus, sign up for moomoo and receive a starter kit worth up to S$220*.
Make a deposit of S$2,700 or more and receive up to 1 Apple stock (worth approximately S$200) for free. You can also enjoy up to SGD20 (SGD2 per day for 10 days) when you invest SGD100 or more in moomoo Cash Plus. In addition, there will be a permanent $0^ commission on US Listed Stocks and ETFs in your investment portfolio.
Also read: Call & Put Options Trading – 4 Trading Strategies Long Term Investors Can Use
All views expressed in this article are the independent opinions of DollarsAndSense. moomoo Singapore or its affiliates are not responsible for the content of any information provided. This ad has not been reviewed by the Monetary Authority of Singapore.
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