If the above sounds oddly familiar yet totally bewildering to you, you are not alone. Options trading has been around for a long time, yet it can still sound daunting to even the most seasoned of investors.
However, for those who eventually make the leap, options trading often becomes a versatile tool for investors to gain even more value beyond mere stock ownership.
If demystifying options is something you’re interested in, then stick around – you might just discover a useful new tool to add to your trading arsenal. We’ll also be sharing how you can get started trading options using Tiger Brokers, even as a complete novice.
What are options?
Put very simply, options are “contracts” that gives the “contract’s owner” the right but not the obligation to trade (buy or sell) an underlying asset at a specified price by a certain date.
Hence, options trading lets “contract owners” potentially enjoy profits from the changes in the price of an asset, even if they don’t own them yet.
Options are highly versatile, allowing investors do all sorts of funky things like hedging against market risk, opportunities for generating side income, or maximising profits from market movements.
However, besides the numerous benefits of options trading, do note that it comes with its own fair share of risks as well. This includes the increased complexity compared to simply trading stocks, as well as the substantial risks (in some cases, unlimited risk) involved with strategies such as naked calls or puts.
But before we get into all that, here’s a simpler (hopefully) example to help you understand options better.
Example of an option trading strategy: Covered calls
A call option gives the “contract owner” the right, but not the obligation, to purchase your stock at a specified price by a specific date.
To execute a “covered call” strategy, you would have to sell a call option for stocks you already own. This means that whoever buys the option from you can choose to purchase your stocks at a predetermined price when the time comes.
For example, imagine you bought 100 shares of a stock at $5 each.
You might choose to sell a call option that expires in a week on 100 shares of this stock with a strike price of $10 for $0.50 per share.
This means that in one week’s time, whoever had bought this option from you has the right to buy 100 shares of this stock at $10 each.
However, by selling this call option contract, you would already have earned an immediate cash flow of $50 ($0.50 x 100 shares per contract).
Two different scenarios might happen in a week’s time:
- For most cases, as long as the stock price remains below $10 (it drops or stays constant), you get to keep the $50 you received from selling the options as the option buyer won’t exercise the option.
- If the stock price goes anywhere above $10 (regardless of whether it’s $11 or $110), the option buyer may choose to exercise the option and buy the shares from you at $10 per share. This means that you would sell your 100 shares at $10 each for a total of $1,000.
In the second scenario, your total profit would be $550 [($10 sale price – $5 purchase price + $0.50 option premium) x 100 shares]. That would also be the maximum you can make with this covered call strategy.
Reasons for using an options strategy like covered call
As you can see from the above example, covered calls typically makes more sense in neutral to moderately bullish markets, where large price gains are not anticipated so you can minimally profit from the premiums while managing some downside risk.
Various factors would often be considered when embarking on such a strategy. These would include aspects such as the stock’s volatility and valuation which would affect the premiums as well as the likelihood of the stock reaching its strike price.
Overview of risks involved with options
All things considered, covered calls involve specific risks and trade-offs that investors should fully understand before implementation. Beyond covered calls, some risks typically associated with options strategies include:
- Assignment Risk
When you sell options (particularly covered calls or cash-secured puts), there is a chance you may be assigned before the expiration date. In other words, you might be forced to buy or sell the underlying stock, potentially even at an unfavourable price.
- Volatility Risk
Market volatility can also significantly affect options prices. This means that even if the underlying stock remains stable, sudden changes in volatility can cause option premiums to vary unpredictably. It is important to stay aware of this to manage your returns when volatility doesn't behave as expected.
- Time Decay (Theta Risk)
As options involve a preset duration and target price, over time, the options contract will lose its value, especially as it nears expiration. This is called “time decay” and it works against option buyers because it simply means that a contract’s value will diminish even if the stock price stays flat.
Ultimately, it is critical to understand that while options trading can be a great asset to your portfolio, it also requires a great deal of understanding and regular attention. Make sure you have learnt the basics and are aware of the risks before you dive in. Fortunately, with Tiger Brokers, there are many avenues for you to learn what you need before you begin
Just a drop in the options ocean
It is important to note that the example describe earlier is just one of many options strategies available to investors, and the beauty of options is that besides being extremely versatile, you can even combine them to execute advanced trading strategies. These are called multi-leg options.
Furthermore, with platforms like Tiger Brokers offering all sorts of advanced new tools, investors of all skill levels can have a better grasp of what they’re doing, and you don’t even need to be a pro to get started.
For example, on the Tiger Trade app, you can get automatic calculations for metrics like your maximum profit, loss, breakeven and margin. This lets you get a hang of multi-leg options without being blown away by the choices before you.
Some other feature on the Tiger Trade app that are designed to help beginners include:
- Free real-time market data that lets you keep up to date with market trends and emerging opportunities
- Trade Feed, where you can subscribe to seasoned investors’ orders and get trading inspirations and leverage tools to enhance your trading strategies
- Access to Tiger Community, where you can hone your trading expertise by tapping into the knowledge of the community, exchanging insights and investment ideas with other traders
- Demo account to practice options trading with up to $1 million in paper trading
More reasons to trade options with Tiger Brokers
Highly competitive fees
Besides basic option orders, Tiger Brokers is built to support multi-leg orders, and fees are charged only once per order – as low as USD$0.65 per contract!
Many brokers only allow single-leg option trades, where each order is charged separately. For traders using multi-leg strategies, this often means paying multiple fees, which can quickly drive up costs for more advanced trades.
With Tiger Brokers, you get the advantage of discounted fees on complex strategies with up to four legs in a single combo. On top of that, you can place all legs of your strategy in one go—saving both time and effort compared to entering each leg individually.
Advanced features for seasoned users
Tiger Brokers supports multi-leg orders that lets you execute a variety of advanced strategies according to your view of the markets. For U.S. options, you can trade options with up to four legs combo, giving you the following advantages:
- Margin discounts, especially benefitting income strategies (more on this later)
- Risk management, by placing multi-leg orders that ensure simultaneous execution to more effectively hedge your portfolio against risk
- High degree of customisation, matching different market outlooks, investment objectives and individual preferences
Furthermore, you’ll gain access to a series of advanced tools to help you execute multi-leg strategies more effectively. These include:
- Multi-leg Strategy Analysis. The Tiger Brokers app calculates real-time strategy-level Greeks, maximum profit and loss, and breakeven points, giving you complete control over your strategies
- Estimated margin calculation, allowing you to deploy your funds more efficiently
- P&L curve that supports both intraday and expiration curves, to better visualise the difference in breakeven points
Note: While multi-leg combos can help manage risk or reduce costs, they also come with added complexity. For example, if one leg of your position is assigned early, it may leave the remaining legs exposed, potentially triggering higher margin requirements or unintended risks. It’s important to understand how each leg works together before placing a combo trade.
Conclusion: Start trading options with Tiger Brokers today
Conclusion: For both beginners and experienced traders, Tiger Brokers provides a strong gateway into the world of options.
Tiger Brokers offers a robust platform for investors who want to explore options trading as part of their wealth-building journey. For those interested in multi-leg strategies, the platform provides native support for up to four-leg combos, a powerful suite of analysis tools, and some of the lowest multi-leg trading fees in Singapore.
New to options? Beginners will appreciate Tiger’s user-friendly interface, educational resources, and built-in trading tools, making it easier to get started with confidence.
Right now, Tiger Brokers is also partnering with SGX—enjoy $0 commission and no custody fees* when trading SGX-listed securities. Plus, SGX CDP custody fees are waived for Tiger users until further notice, with no extra steps required.
For more information, please visit https://www.itiger.com/sg/commissions/ for other applicable fees.
Whether you’re a seasoned trader or just starting out, Tiger Brokers is one of the most compelling options trading platforms available today.
Disclaimer: Trading of Options can carry a high level of risk, and may not be suitable for all investors. Not financial advice. Investment involves risk. This advertisement has not been reviewed by the Monetary Authority of Singapore.
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