Asia is home to some of the world’s largest exchanges. To give you an idea about the size of some of these exchanges are, Singapore has more than 2000 companies listed while Hong Kong has more than 1500. Listed options in Asia also have some unique characteristics that investors need to know before trading them.
When trading listed options in Asia can seem intimidating, but there are many benefits to opening a position that will outweigh the limited knowledge most traders have. An option buyer has a right, but not an obligation, to buy or sell a financial instrument at a certain price on a specific date.
As such, they tend to be riskier investments than other types of trading with potentially high returns and equally high losses. The six key things you should know about listed options in Asia are;
Listed options are not for beginners.
As with any trade, it pays to know what you’re getting into when you start trading a new product. But with Asian options, this is especially true because they come with several risks and intricacies that other forms don’t have.
Margin requirements can blow up your account balance very quickly
Margin requirements are how much of your account balance you need to cover the option transaction. They can be pretty high for specific Asian options, especially on some more exotic ones. And if you don’t have the margin in your account, trading becomes impossible until it has been deposited or made available somehow.
Don’t let commissions eat up your profits.
Asian options typically have very low margins, which means that every little bit counts – including what’s being paid out to brokers through commission costs. This is why it pays to have access to platforms with lower rates than the industry standard so that you do not lose money on every trade just because of commission costs.
Your broker may not tell you about all available positions
Many brokers know that some of the more exotic Asian options are not suitable for most traders. This is also why they may not tell you about all the possible positions available on your platform. When it comes to these products, broker discretion can determine whether or not you get access to them at all.
Expensive doesn’t always translate into better.
Just because a listed option is more expensive than another product does not mean that it’s better in every way. There are many types of Asian options that are very cheap but come with special conditions and constraints that make them almost useless for trading purposes. At the same time, there are some more expensive options out there that have very few downsides compared to their cheaper counterparts.
Taking control matters when it comes to risk
The stock market is very volatile, and traders tend to make more money than they lose over time, but there are some pitfalls when trading listed options; these include counterparty risk (e.g. insolvency of broker), early assignment risk (e.g. forced exercise) and situation-specific risks like interest rates, liquidity of underlying stocks, etc.
Don’t leave it up to your broker regarding risk management. Take charge of what risks you’re taking and why by researching the products you’re trading and understanding their risks as thoroughly as possible. This way, you can better judge whether or not a product is appropriate for you and your account balance before getting started.
Options transactions in Asia can occur either through electronic exchanges or by phone. Different brokers will require different information depending on their specifications, but some standard ones include deposit methods, screen names, and contact information. Traders need to look into current market conditions and how this might affect prices before opening a position upon understanding the basics of trading listed options in Asia. As with any financial instrument, there are risks involved. There are even certain situations when trading listed options are not advisable, and when you’re in doubt, speak with a reputable online saxotrader from Saxo Bank.