What are options anyway?
Options – a complicated why of getting exposure to the stock, without actually getting involved.. Let’s dive in.
What are options? Textbook answer would say that option gives you the rights but not the obligation to purchase/sell the underlying securities at the strike price on the expiration date. It is also known as Derivatives, because it is “created” via financial engineering to allow investors to profit/loss from the price movement of the underlying shares without actually owning it or ever owning it.
There are 2 types of options: Call and Puts, here are the terminologies to get you started!
1. Call Option: Gives you the rights to buy the underlying assets
2. Put Option: Gives you the rights to sell the underlying assets
3. Strike Price: The price in which buy/sell transaction will occur
4. Expiration: The date in which buy/sell transaction will occur
5. Premium: The price you pay/receive in connection to the future commitment via the options
There are multiple strategies that we can explore with options, but lets start with one such strategy, buying Call Options.
Why would we buy call? One should only enter a call option when you hold a view that the underlying securities will increase in price. This is because, call option gives you the rights to buy and if you are bullish, locking in a low price now would be superb deal when the underlying stock “goes to the moon”.
Also! Don’t forget that with each option, you are controlling 100 shares. So, reminder to multiply by 100 for the option prices you see on your brokerage apps.
Let’s try a scenario to visualize this:
ABC Limited is current priced at $100.
I bought a Call Option for $100, to purchase the shares of the Company at $100 expiring in 30 days.
If ABC Limited goes up to $105 in the next 30 days, I would have profited $400 (Less premium).
But if it goes down to $95, there is no need to exercise the option and you can let it expire worthless, essentially capping your losses at $100 (premiums paid).
We hope this was helpful! Please let us know if you have questions and we will explore other option strategies next time!
#sginvesting #Singaporefinance #SGStocks #SGMoney #MYInvesting
When I first started exploring options trading, the complex jargon and concepts seemed overwhelming. However, breaking down the key terms like call options, put options, strike price, and expiration helped me build a clearer understanding. One crucial insight I found valuable is that options are contracts giving you rights but no obligation, which allows you to limit your risk compared to buying stocks outright. For example, controlling 100 shares per option contract offers significant leverage. This means you can gain exposure to stock price movements with less capital, but it also requires careful attention to premium costs since they affect your potential profits and losses. Using scenarios, such as buying a call option when you expect the stock price to rise, helped me see how losses are capped by the premium paid, while gains can be substantial. Another practical tip I discovered is to track the expiry and strike price closely, as timing your trades towards expiration can make a big difference in outcomes. Understanding options as derivatives helps frame them as financial tools engineered to provide flexibility—whether you want to hedge your existing positions or speculate on price moves. Additionally, the risk and reward dynamics depicted on options interfaces, including whether you buy or sell calls and puts, were eye-opening. It’s essential to get comfortable with these aspects before expanding into more advanced strategies like spreads or straddles. Overall, starting with the basics of call and put options, premiums, strike prices, and expiration dates laid a solid foundation. From there, gradually experimenting with simple option purchases gave me confidence to explore additional strategies. For anyone new to options, taking the time to learn these terms and practicing with hypothetical scenarios will make the journey much more manageable and rewarding.
