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Regarding stock trading, there are various strategies that investors can use to succeed. One strategy traders often use, especially in the Singapore market, is options trading.
For several reasons, options trading can be a great way to improve your stock trading results:
- Options can provide you with additional flexibility regarding your investment strategies.
- Options can help you manage risk more effectively.
- Options can allow you to take advantage of opportunities that might not be available if you only used traditional stock trading strategies.
Use options to provide additional flexibility
Flexibility is one of the critical advantages of options trading. You are usually limited to buying or selling the actual shares when you trade stocks. However, with options, you have much more flexibility. For example, you can use options to:
- Hedge your positions
- Speculate on the price movement of a stock
- Generate income
You can do these with much less capital than if you were only trading stocks. In addition, because options contracts are standardised, you can trade them on exchanges worldwide, allowing you to take advantage of global market events to improve your results.
Use options to manage risk more effectively
Another convenience of options trading is that it can help you manage risk more effectively. When you buy or sell stocks, you are exposed to the full-price movement of the stock. However, when you trade options, you can choose to use different strategies that limit your risk exposure.
For instance, if you buy stock for SGD100 and it falls to SGD50, your loss will be 100%. However, if you sell a put option with a strike price of SGD50, you will limit your maximum loss to the premium you received for selling the option. This way, options can help you protect your positions and limit losses.
Use options to take advantage of opportunities
Another convenience of options trading is that it can allow you to take advantage of opportunities that might not be available if you only used traditional stock trading strategies. For example, you can use options to:
- Trade when a stock is halted
- Take a position without owning the underlying security
- Get exposure to foreign markets
- Trade on margin
- Trade after hours
Options provide a lot of flexibility and can help you take advantage of opportunities that might not be available if you only traded stocks.
Use options to generate income
One of the benefits of options trading is that it can help you generate income. There are two main ways to generate income from options:
- Selling options
- Writing covered calls
Selling options are excellent for generating income if you think the stock price will stay relatively flat or move lower. When selling an option, you collect a premium from the buyer. You can keep the entire premium if the stock price doesn’t move much. And if the stock price falls, you still make money if it doesn’t fall below the option’s strike price.
Writing covered calls is another way to generate income from options. When you write a covered call, you sell an option and, at the same time, buy the underlying stock. You get to keep the premium if the stock price doesn’t move. And if the stock price goes up, you make money from both the option and the stock.
Covered calls are a great way to generate income if you think the stock price will go up.
Use options to trade on margin
Another way to use options is to trade on margin. You can borrow money from your broker to buy or sell stocks when you trade on margin, allowing you to leverage your investment and potentially make more money. However, it also increases your risk because you can lose more money if the stock price decreases.
You need a margin account to trade with margin. This particular account allows you to borrow money from your broker. You can usually get a margin account with any online broker.
Once you have a margin account, you can use it to buy or sell stocks. When you buy stocks on margin, you only need to put up a percentage of the stock’s price. For instance, if you fancied buying SGD1,000 worth of stock and the margin requirement was 50%, you would only need to put up SGD500. The other SGD500 would be borrowed from your broker.
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