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Options trading boomed in 2022 – with a record 10.3 billion put and call contracts traded during the year. This marks the third straight year that options trading volume has grown and is more than double compared to 2019, prior to COVID-19.
Given its rising importance and liquidity in the financial markets, both investors and traders can benefit from buying and selling options contracts. Partly fueling this trading surge are certain key characteristics of trading an options contract.
First, we can trade both directions in the market, whether we believe prices will go up or down. We can also take both sides of a trade, buying or selling an options contract (whether a put or a call). Lastly, we can get leverage up our trades with a relatively small investment capital, which lowers the investment barriers.
One other factor that may attract more retail investors to use options is the entry of several trusted online brokerage firms, including moomoo SG. On top of a very competitive commission rate (moomoo’s options trading brokerage commission is US$0.65 per contract, with a minimum of US$0.99 per order), online brokerages are also committing to the education of options trading.
When buying or selling an options contract, we should familiarise ourselves with the options trading tools and features that our brokerages are providing. We use the moomoo SG mobile trading app, but the steps and tools in other mobile trading apps should be similar.
Read Also: Beginner’s Guide To Start Options Trading In Singapore
#1 Real-time Options Chain with Customisable Filters
When trading options, we should become familiar with reading the Options Chain. This will show us several things about the options contract we intend to trade, including 1) displaying both Call and Put options, 2) the Expiration Date for the options contract, 3) the latest price and current Bid/Ask price for the options contract, and 4) various Strike prices for the underlying counter. Our trading platform will also enable us to view more technical indicators and toggle between the individual option contract details.
To navigate to the Options Chain screen, we simply need to select a counter that we wish to trade an options contract and click the “Options” tab.
Source: All screengrabs in the article are from the moomoo SG mobile trading app
In the example above, we can see that Tesla is currently trading at US$143.890 (as at 25 Jan 2023). Depending on the direction we believe Tesla shares will move, we can buy or sell a put or call option. We also need to select an expiration date.
Assuming we believe Tesla shares will rise above US$150 — or about 5% — in the next month, we can choose to buy a call option maturing on 24 February 2023. Doing this gives us the option to buy Tesla shares at US$150 regardless of how high Tesla shares rise. If Tesla shares do not rise above US$150 or, worse, slump, we are not required to buy the shares. For this benefit, we have to pay a fee of around US$9.03 per share or US$930 for a minimum options contract of 100 shares.
Alternatively, we can choose to sell a put option – i.e. requiring us to buy Tesla shares (if it drops below the Strike Price). Doing this is especially ideal if we are looking to build a position in Tesla shares. When we sell a put, we can earn an income (that the buyer of the option contract has to pay). Based on the screengrab above, since we believe Tesla shares will rise, we can choose to sell a put option at a strike price of US$142 (or slightly above or below the current Tesla share price). We will receive around US$1,025, but have to buy Tesla shares no matter how low they fall below US$142.
#2 Options Price Calculator
Looking at the Option Chains, we will have a good indication of the current trading price of an option. Nevertheless, there are more scientific ways to determine a fair value for an option.
For those who studied economics or chose a relevant module in university, you may recall that one way we can do this is through the Black-Scholes Model.
Source: Investopedia
That’s the formula for it.
Fortunately, we can rely on moomoo’s Price Calculator to derive the theoretical price of an option. We can get to moomoo’s price calculator by selecting a specific option contract quote and scrolling down.
Using Tesla shares again, we can see that the theoretical price for the call option with a strike price of US$150 is US$7.832 – and the current price is about 13% higher.
This can be a gauge for how far off or close to the theoretical price the current options contract is trading at. We can also shift around parameters, such as the date and risk-free rate (do note that the default is set at 1%), to estimate price changes in the options contract.
#3 Options Volatility Analysis
Volatility refers to the fluctuations in the market price of an underlying asset. Through moomoo’s Volatility Analysis tool, we can view the relationship between the implied volatility, or IV, and the historical volatility of an options contract. We can navigate to this tool by clicking into a specific options contract quote, and selecting the Analyses tab.
The implied volatility of an options contract depicts how volatile its price may be in the future. If an options contract has a high implied volatility, it means that the market expects large price swings (either up or down) in the future.
As we can see in the screengrab, the implied volatility of Tesla (blue line) is lower than its 30-day historical volatility (orange line). Thus, it may be that the market is expecting Tesla’s shares to have lower price volatility compared to its 30-day historical volatility.
In general, a lower implied volatility should translate into lower premiums on an options contract.
#4 Options P/L Analysis
When trading options, it can be important to know what is at stake — i.e. our maximum profit, maximum loss and break-even point — and consider our strategy in any particular options trade. An options profit and loss calculator can help us analyse our trades before we make them.
We can navigate to this tool by clicking into a specific options contract quote, and selecting the Analyses tab. We need to scroll down (from the Volatility Analysis tool described above) to see the P/L Analysis.
We can see that if we buy a call option for Tesla at a strike price of US$150 (the chart on the top), we will need Tesla to trade at US$159.15 on 24 Feb 2023, before we break even on our options trade.
Even though Tesla may trade above US$150, we will still be making a loss because we would have had to pay US$915 to buy the call option in the first place. Nevertheless, we can also see that once Tesla shares are trading above the US$150 strike price, our losses start narrowing, which also means we can consider exercising our call option despite still making an overall loss.
Depending on the exact option contract we want to trade, we can analyse the various profit and loss calculations.
Read Also: moomoo Cash Plus: How Can We Earn Even Higher Returns While Investing
Trading Options Can Help You Hedge Against Volatility
While the volume of options trading has surged to record levels, it may still be relatively complex for some retail investors. Rather than choosing to avoid it, we could make it a point to understand it and better utilise options as part of our overall trading/investment strategy.
Beyond trading for short-term profits, options can also protect our long-term investment portfolio. During times of heightened volatility – which we are experiencing today – we can use options to hedge our long-term positions in the stock market.
If we currently own Tesla shares because we believe in its long-term growth trajectory but are worried about the near-term volatility, we can hedge our portfolio. When we buy a put option, we are able to limit our downside risk (i.e. being able to sell our Tesla shares at a set price) by paying a small premium.
At the same time, we will continue to enjoy further potential upsides – as Tesla shares have already gained nearly 33% in the first 25 days of the year.
We can start buying and selling both put and call options with moomoo – which provides low brokerage commissions and a comprehensive range of options trading tools. Moreover, those who sign up with moomoo can also collect a Starter Kit worth up to S$220*.
You will receive up to 1 free Apple share (worth approximately S$200) when you make a deposit of S$2,700 and above. You also enjoy up to S$20 (S$2 a day for 10 days), when you invest at least S$100 in moomoo Cash Plus. Moreover, you also get to enjoy $0 commissions forever^ on US-listed stocks and ETFs for your investment portfolio.
Read Also: Call & Put Option Trading – 4 Buying & Selling Strategies That Long-Term Investors Can Use
All views expressed in the article are the independent opinions of DollarsAndSense. Neither moomoo Singapore or its affiliates shall be liable for the content of the information provided. This advertisement has not been reviewed by the Monetary Authority of Singapore.
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^Platform & other fees apply
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