Options trading has been gaining momentum in recent years. A record 10.3 billion US stock option contracts were traded in 2022 – the third straight year it has surpassed a new record. With more competitive online brokers setting up shop in Singapore, local investors can also start trading call and put options.
We will look at options trading through the perspective of buying and/or selling US stock options contract – the biggest and most prominent options market for Singapore investors currently.
What Are Call Options And Put Options?
A call option gives us the right, but not the obligation, to purchase an underlying asset at a specified strike price, on the expiration date. We have to pay a premium, as well as brokerage fees, to execute this trade.
On the other hand, a put option gives us the right, but not the obligation, to sell an underlying asset, at a specified strike price, on the expiration date. Similarly, we have to pay a premium and fork out the brokerage fees.
Typically, we buying or selling one unit of options contract is equivalent to 100 stocks. For example, if we want to trade 2 units of an Amazon options contract, a quote price of US$3 equates to a premium of US$1,500 (US$3 premium per Amazon stock x 200 Amazon stocks). We need to bear in mind that Amazon is trading at close to US$100 per stock, which means our position size is US$20,000 (US$100 trading price x 200 Amazon stocks)
Benefits Of Options Trading
While options may be perceived as riskier than stocks, they provide various benefits for both investors and traders.
Firstly, there is flexibility to either 1) buy a call option; 2) sell a call option; 3) buy a put option; and/or 4) sell a put option. Depending on where we think the market is headed, we are able to take a position to potentially profit if we turn out to be correct.
By trading options, we can also hedge our existing investment portfolio. For example, we can buy a put option if we are worried about a short-term drop in price of our investments, but do not want to liquidate entirely as we still believe in the longer-term investment merits. However, we have to pay a premium for this. We can also choose to sell a covered call to earn a premium. The downside to doing this is that we become obligated to sell our stocks if prices go in the opposite direction than what we predicted.
Investors can earn a regular income by buying and/or selling options contract. Traders can profit in either direction they believe the market is headed. For those who own a stock portfolio, we can also sell covered calls on stocks that we own, or covered puts on stocks that we have ready cash to buy. Trading options also enable us to diversify our income sources from our investment portfolio and/or trading strategy.
Options trading is also cost-efficient. We can amplify our exposure to a position without requiring a lot of capital to own the stocks. However, this can also be a risky strategy as losses can similarly be significant.
Types Of Fees We Have To Pay When Trading Options
The most common brokerage fees we incur is the Commissions and/or Platform Fees. Certain types of brokerages divide the fees in this way, while others simply charge a commission. There may also be a minimum amount that we incur for each of these types of charges.
There are also third-party regulatory and transaction charges that we have to pay when trading options.
An Options Regulatory Fees (ORF) is levied on all options contracts that are traded. This will cost us US$0.02905 per options contract.
We also incur OCC Clearing Fees on all options contracts that we trade. The OCC, or Options Clearing Corporation, serves as a central clearinghouse and regulator for listed options typically traded in the United States. We can expect to pay US$0.02 per options contract.
SEC Fees are also charged for all sell orders only. This is paid to the SEC or the US Securities and Exchange Commission. We have to pay US$0.000008 x Transaction amount, or can expect a minimum of US$0.01
Similarly, Trading Activity Fees are applied to sell orders only. This is paid to FINRA, or the Financial Industry Regulatory Authority, that regulates member brokerage firms and exchange markets. We have to pay US$0.00244 x Quantity Sold, or can expect to pay a minimum of US$0.01.
Since we are in Singapore, we also incur the 8% GST rate on fees that we have to pay.
As we can see, these third-party charges are minimal and also uniform across all brokerages, so we can expect the biggest and main difference in cost to come from brokerage-related charges.
Comparison Of Options Trading Fees Of Brokerages In Singapore
Here, we will compare local low-cost brokerages that give us access to trading US stock options contracts. Here’s how much we can expect to pay when buying and selling US stock options contracts.
|Stock Brokerages||Trading Fees (per contract)||Minimum Trading Fees (per contract)|
|Interactive Brokers (IBKR)||US$0.65||US$1|
|moomoo||US$0.65 (min US$1.99/order) + Platform Fees of
US$0.30/contract (min US$0.99/order)
|ProsperUs (by CGS CIMB)||US$2||US$2|
|SAXO Capital Markets||US$3||US$3|
|Tiger Brokers||US$0.65 (min US$1.99/order) + Platform Fees of
US$0.30/contract (min US$1/order)
|Usmart||US$0.20 (min US$0.20/order) + Platform Fees of
US$0.30/contract (min US$1/order)
|Webull||No commissions||No minimum|
– Interactive Brokers (IBKR) provides lower-cost trading fees depending on monthly volumes traded. They offer options trading markets across North America, Europe and Asia Pacific.
– SAXO Capital Markets provides lower-cost trading fees depending on account type. They offer stock options for Hong Kong, Europe and Australia markets.
– Tiger Brokers provides a lower-cost tiered commission plan based on monthly volume traded. They offer stock options for Hong Kong market
– Webull charges US$0.55 for certain index options.
– Stock brokerages may also charge various carrying costs, including for margin, short positions, exercise, assignment fees and others.
As you can see, not all brokerages in Singapore offer stock options trading. In fact, many of the local brokerages do no offer options trading. If we want to regularly trade options, it may be useful to invest with a brokerage firm that enables us to hold, trade and preview our entire investment portfolio within a single brokerage account.
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