Options trading is a type of trading that allows investors to speculate on the direction of an underlying asset’s price without having to purchase the asset itself. Options contracts give the holder the entitlement, but not the duty, to buy or sell an asset at a particular price by a specific date. Those interested can try options trading through Saxo Bank.
Covered Calls
A covered call involves both writing a call option on the underlying security and holding a corresponding position in the underlying security. The purpose of a covered call is to generate income through the sale of the call option while simultaneously limiting the upside potential of the underlying security position.
To execute a covered call, an investor first buys underlying security, such as 100 shares of XYZ stock. The investor then sells one XYZ call option against this position. The sale of the XYZ call option obligates the investor to sell XYZ shares at the strike price if the option is assigned, but it also provides downside protection in case the stock price falls.
Put Selling
Put selling is a strategy where an investor writes (sells) a put contract on the underlying security and hopes to earn premium income from the sale. The key to this strategy is that the investor must be willing to buy the underlying security at the strike price if it falls below that level by expiration.
To execute a put sell, an investor first sells a put contract on an underlying security. The sale of the put requires the investor to buy the underlying security at the strike price if it falls below that level by expiration and the option is assigned. The critical risk of this strategy is that the underlying security could fall sharply in price, resulting in a significant loss.
Bull Put Spread
A bull put spread involves the purchase of a put option with a lower strike price and simultaneously selling a put option with an inflated strike price on the same underlying security. This strategy aims to generate income from the premium received from selling the higher-strike put while limiting the downside risk of owning the lower-strike put.
To execute a bull put spread, an investor buys one XYZ put option with a strike price of SGD50 and sells one XYZ put option with a strike price of SGD55. The sale of the higher-strike puts offsets the cost of buying the lower-strike puts and creates a credit spread.
Bear Call Spread
A bear call spread involves the purchase of a call option with a higher strike price and selling a call option with a decreased strike price on the same underlying security. This strategy aims to generate income from the premium received from selling the lower-strike call while limiting the upside risk of owning the higher-strike call.
To execute a bear call spread, an investor buys one XYZ call option with a strike price of SGD55 and sells one XYZ call option with a strike price of SGD50. The sale of the lower-strike calls offsets the cost of buying the higher-strike calls and creates a credit spread.
Iron Condor
An iron condor profits from low volatility in the underlying security. It involves the simultaneous purchase of a put and a call with different strike prices, as well as the sale of a put and a call with different strike prices.
To execute an iron condor, an investor buys one XYZ put option with a strike price of SGD50 and one XYZ call option with a strike price of SGD55. The investor also sells one XYZ put option with a strike price of SGD45 and an XYZ call option with an exercise rate of SGD60. The investor receives a premium for selling the options and pays a premium for buying the options.
Butterfly Spread
A butterfly spread is a strategy that uses three contracts of the same type with the same security and expiration date but with three different strike prices.
To execute a butterfly spread, an investor buys one XYZ call option with a strike price of SGD50, sells two XYZ call options with a strike price of SGD55, and buys an XYZ call option with an exercise rate of SGD60. The investor pays a premium for the options purchased and receives a premium for the options sold.
Options trading is a type of trading that allows investors to speculate on the direction of an underlying asset’s price without having to purchase the asset itself. Options contracts give the holder the entitlement, but not the duty, to buy or sell an asset at a particular price by a specific date. Those interested can try options trading through Saxo Bank.
Covered Calls
A covered call involves both writing a call option on the underlying security and holding a corresponding position in the underlying security. The purpose of a covered call is to generate income through the sale of the call option while simultaneously limiting the upside potential of the underlying security position.
To execute a covered call, an investor first buys underlying security, such as 100 shares of XYZ stock. The investor then sells one XYZ call option against this position. The sale of the XYZ call option obligates the investor to sell XYZ shares at the strike price if the option is assigned, but it also provides downside protection in case the stock price falls.
Put Selling
Put selling is a strategy where an investor writes (sells) a put contract on the underlying security and hopes to earn premium income from the sale. The key to this strategy is that the investor must be willing to buy the underlying security at the strike price if it falls below that level by expiration.
To execute a put sell, an investor first sells a put contract on an underlying security. The sale of the put requires the investor to buy the underlying security at the strike price if it falls below that level by expiration and the option is assigned. The critical risk of this strategy is that the underlying security could fall sharply in price, resulting in a significant loss.
Bull Put Spread
A bull put spread involves the purchase of a put option with a lower strike price and simultaneously selling a put option with an inflated strike price on the same underlying security. This strategy aims to generate income from the premium received from selling the higher-strike put while limiting the downside risk of owning the lower-strike put.
To execute a bull put spread, an investor buys one XYZ put option with a strike price of SGD50 and sells one XYZ put option with a strike price of SGD55. The sale of the higher-strike puts offsets the cost of buying the lower-strike puts and creates a credit spread.
Bear Call Spread
A bear call spread involves the purchase of a call option with a higher strike price and selling a call option with a decreased strike price on the same underlying security. This strategy aims to generate income from the premium received from selling the lower-strike call while limiting the upside risk of owning the higher-strike call.
To execute a bear call spread, an investor buys one XYZ call option with a strike price of SGD55 and sells one XYZ call option with a strike price of SGD50. The sale of the lower-strike calls offsets the cost of buying the higher-strike calls and creates a credit spread.
Iron Condor
An iron condor profits from low volatility in the underlying security. It involves the simultaneous purchase of a put and a call with different strike prices, as well as the sale of a put and a call with different strike prices.
To execute an iron condor, an investor buys one XYZ put option with a strike price of SGD50 and one XYZ call option with a strike price of SGD55. The investor also sells one XYZ put option with a strike price of SGD45 and an XYZ call option with an exercise rate of SGD60. The investor receives a premium for selling the options and pays a premium for buying the options.
Butterfly Spread
A butterfly spread is a strategy that uses three contracts of the same type with the same security and expiration date but with three different strike prices.
To execute a butterfly spread, an investor buys one XYZ call option with a strike price of SGD50, sells two XYZ call options with a strike price of SGD55, and buys an XYZ call option with an exercise rate of SGD60. The investor pays a premium for the options purchased and receives a premium for the options sold.