Options provide the buyer with the opportunity, but not the obligation, to purchase or sell an underlying asset at a specified price during a defined period. There are various trading options methods, and in this article, we will explore six of the most commonly used methods in Hong Kong. For those interested in options trading, be sure to work with a reliable broker such as Saxo.
1. Buying calls
Purchasing a call option is one way to wager that the underlying asset price will rise. If the underlying asset price rises, the investor will exercise their option and purchase the asset at the agreed-upon price. The investor then sells the asset at the market price, typically higher than the strike price and pockets the difference as profit.
2. Buying puts
Purchasing a put option in Hong Kong is one way to wager that the underlying asset’s price will fall. If the underlying asset price does indeed fall, the investor will exercise their option and sell the asset at the agreed-upon price. The investor then repurchases the asset at the market price, typically lower than the strike price, and pockets the difference as profit.
3. Writing covered calls
Writing a covered call is when an investor sells a call option on an asset they already own. The investor collects a premium from selling the option, but if the buyer exercises their option, then the investor must sell their underlying asset at the agreed-upon strike price. Investors often use this strategy to generate income from their holdings.
4. Writing naked calls
Writing a naked call is when an investor sells a call option on an asset they do not own. The investor collects a premium from selling the option. Still, if the buyer exercises their option, the investor must purchase the underlying asset at the agreed-upon strike price to sell it to the buyer. This strategy is considered riskier as the investor does not have the asset to cover their obligations if the buyer exercises their option.
5. Writing covered puts
Writing a covered put is when an investor sells a put option on an asset that they already own. The investor collects a premium from selling the option, but if the buyer exercises their option, the investor must purchase the underlying asset at the agreed-upon strike price. This strategy can be used by investors looking to generate income or protect against downside risk.
6. Writing naked puts
Writing a naked put is when an investor sells a put option on an asset that they do not own. The investor collects a premium from selling the option, but if the buyer exercises their option, the investor must purchase the underlying asset at the agreed-upon strike price. This strategy is considered riskier as the investor does not have the cash on hand to cover their obligations if the buyer exercises their option.
What are the benefits of using an options trading method?
Some benefits of using options include:
- The ability to hedge against the risk
- The ability to speculate on the price of an asset
- The ability to generate income
- The ability to protect against downside risk
What are the risks of using an options trading method?
Some risks associated with options trading include:
Time decay
As an option contract’s expiration date approaches, the option contract’s value decreases because there is less time for the underlying asset’s price to move in the desired direction.
Loss of premium
If the underlying asset’s price does not move in the desired direction, the option contract will expire worthlessly, and the investor will lose their entire investment.
Volatility risk
Suppose the underlying asset’s price is highly volatile. In that case, the option contract’s value will also be more volatile, which means there is a greater chance that the option contract will expire worthlessly.
The final word
In general, options are considered risky investments because there is a potential for significant losses. However, traders can also use them to hedge against risks or speculate on the prices of assets. As such, understanding the risks before investing in options is essential for investors.