Options are a complex financial instrument – they offer opportunities for enhanced returns and carry higher risk. However, in Hong Kong, even novice traders can delve into this form of trading as the market is relatively tiny and options prices are quoted in “dollars per option”.
There are four types of options: call options, put options, covered calls, and strip trades. Call options give you the right to buy an asset at a specific price within a certain time frame.
The other three choices mentioned above involve different forms of hedging or insurance that allow you to reduce your risks while still having greater flexibility. Call options, however, tend to be more suited for advanced users due to their high level of complexities.
Risks associated with trading options
Before buying any option, users should first understand the risks involved. Options are often more costly than purchasing the asset but carry greater risk. For example, an opportunity to buy a stock at $10 may cost $0.50 while the store itself is currently trading at $9.50.
If you choose to exercise your right and purchase the underlying asset at market price, you would only realize a net profit of $0.50 instead of $1 if you hadn’t bought the option in the first place.
Another critical consideration is that options require margin deposits like futures contracts and spot transactions do. This means that funds must be readily available before executing even a simple options trade.
The Hong Kong Stock Exchange (SEHK) charges 1% for every 100 lots traded when using an average daily turnover of more than HK$100 million; however, they do not charge anything when the average daily turnover is at or below HK$100 million, or when you are trading in units of one lot.
Why buy into options?
Investors gamble with buying options if they believe prices will rise within a short time. If they think that there will be massive amounts of people buying their product, they will buy options to purchase stocks at a low price, making it easier for them to profit from future stock values. For example, someone might choose to buy votes for Apple stocks the day before the release of their new phones.
How to take advantage of options trading?
Options can be profitable for investors because they are quick to purchase, and their contracts (premium values) aren’t always monies lost. If you’re willing to take on risks, options might be a good investment.
What is leverage in options trading?
There is no universally accepted definition for what ‘leverage’ means in options trading, but some widely held beliefs about what it entails are mostly true. For example, many assume that if an option has a high degree of leverage, you will need very little capital to purchase that option.
Also, if an option does offer high levels of leverage, many assume you will be able to make a significant return on your investment very quickly.
Using a lot of leverage when trading options can be dangerous, but it is possible to use some force without getting into trouble while still having a successful trading career. To maintain success while using this type of risk, you need to have an accurate trading system that enables you to take advantage of opportunities in the market that offer high returns with the least amount of risk possible.
Over time, many traders who seek out high leverage levels fail because they don’t understand what constitutes acceptable amounts of risk and how much money they should be willing to invest for each trade.
Closing thoughts
Investment is risky, but it’s one of the best ways to ensure that your business or personal interests stay protected financially. Finding the perfect balance between risk tolerance and potential returns is challenging but, if done correctly, can lead to higher rates of return than stock markets. Beginner traders interested in options trading should use an experienced online broker from Saxo Bank.
