Techniques for trading the options market

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The options market allows traders to capitalise on price movements by buying and selling contracts. Trading options in Singapore through a broker like Saxo allow investors to access diverse markets and benefit from various advantages such as low transaction costs, tax benefits, and convenient trading platforms. However, knowing the different techniques available for successful trading in the options market is crucial.

Covered call

The covered call technique is a popular strategy for traders looking to increase their potential earnings and returns from their investments. This approach involves selling call options on stocks that investors already own, allowing them to receive a premium in exchange for agreeing to sell the stock at a predetermined price by a specific date. By doing so, traders can benefit from any capital appreciation in the underlying stock while also receiving regular income from their option premiums.

Collar

A collar is another commonly used options trading strategy. It combines an investor’s holdings of shares with both puts and calls to limit potential losses if the market moves against them. This strategy aims to protect gains made within an investment portfolio by using put options as a hedge against losses and call options which should ideally offset the cost of buying the put option. Traders can also use collars to limit the capital they need to commit to their options positions.

Bull call spread

The bull call spread strategy is a bullish strategy that involves simultaneously buying and selling call options. This approach allows investors to take advantage of any potential increase in the underlying stock’s market price while limiting the losses associated with being outright long on calls. This technique can be an attractive option for traders looking to limit their exposure while benefiting from any market upside potential.

Long straddle

Consider the long straddle strategy if a stock makes an immense shift in price. With this trading method, calls and puts are bought at the same strike price to capitalise on substantial movements, up or down. This way, regardless of whether prices rise or fall, investors can take advantage of sizable shifts in their favour. It can be a riskier strategy than other options strategies, so caution should be exercised when using this technique.

Short strangle

The short strangle trading strategy is the opposite of the long straddle, with investors selling both calls and puts at a specific strike price. This technique allows traders to take advantage of time decay and small price movements in either direction. Still, it can be perilous if the underlying stock makes a significant move against them. Traders should be aware of the potential losses associated with this approach and ensure that they adequately manage their risk.

Calendar spreads

Calendar spreads involve the purchase of options with longer expiries and the simultaneous sale of options that have shorter expiry dates. It is a popular strategy among traders looking to benefit from time decay while limiting their exposure to more significant price movements in the market. Using calendar spreads, investors can reduce their cost basis on an option position or increase their return on investment if the stock moves in their favour.

Why are strategies crucial in options trading?

Though it may seem obvious, having a good strategy is critical to successfully trading the options market. Knowing why strategies are essential can encourage traders to invest the necessary time and effort into developing an effective trading strategy.

It protects your capital

Strategies can help traders protect their capital by limiting the amount of capital they have to commit to a trade. It is imperative when trading options due to the high risk associated with this market and the potential for significant losses if the market moves against them.

It helps you manage risk

Another benefit of having a good strategy is that it can help traders better manage their risk. By understanding the risks associated with each trade before entering it, traders can better protect themselves from significant losses. It can allow them to stay in the market for longer and potentially generate more significant investment returns.

It increases your chances of success

Having an effective strategy also increases the likelihood of success when trading options. Knowing which strategies to use in different markets and which ones are more effective than others can give traders an edge over other less experienced investors.