Blog Common options trading problems in Singapore

Common options trading problems in Singapore


Options trading in Singapore is multiplying, with more and more people adding it to their portfolios. The main reason for this boom is the ease of using options compared to futures or other derivatives. However, this increase in popularity has also brought some problems that Singaporeans need to be aware of. Look here for more info. They are outlined below:

There are too many commissions

Most investors trade over-the-counter (OTC), paying an average commission of $50 per contract (10 contracts = $500). It might seem small, but if you’re trading multiple contracts every month, the commissions can start getting pretty hefty. Furthermore, many dealers even charge an overnight fee, meaning that if you close your position the next day, you’ll be charged another $50.

Contracts are not standardised

It was touched on above but warranted further explanation. While OTC options trading has its benefits (i.e., flexible contract terms), it also makes Singaporeans less aware of the standardisation happening abroad; hence they might end up paying too much for contracts that do not reflect the actual value of the assets involved. It’s essential when trading indices like Nikkei or Nifty, where one lot could result in losses far exceeding the initial margin deposit.

Options expire too quickly

Usually, options will expire after three months max; this means that investors need to keep a close eye on their positions and be agile enough to roll over their contracts into the next month. Not only are contracts expiring monthly, but daily options have also been introduced to the Singapore market, making it even more difficult for investors to keep track.

No advanced trading strategies are available

According to an industry insider, Singapore’s trading strategies beyond simple long-short positions are severely limited. It’s due to the smaller size of its derivatives market than other more extensive exchanges like the US and Europe. Their algorithms can accommodate more complex strategies at a lower cost. Unfortunately, this lack of sophistication has disadvantaged many Singaporean traders.

Regulations are unclear/lax

This issue ties in closely with point 3 above; regulations on OTC options are not clearly defined, which results in investors being unsure about their rights. It’s something that the authorities are aware of but have yet to address.

Cash settlement

Another issue that Singapore options traders face is the non-existence of cash settlements for equity and index options. Currently, there is no system like this available in Singapore where, on expiry, you can receive your cash settlement by selling the underlying stocks without actually buying them. You will have to buy them after all your contracts expire and are ready to sell soon after to not lose out on the profits earned through trading in options.

Stock and index options

Another issue that Singapore options traders face is the difference between stock and index options. Stock options are more popular than index options, but still, many investors find it challenging to understand the underlying securities of each option. Traders need to know that only stocks on SGX have a ‘direct’ mapping with their respective indexes. In most cases, they do not have a direct one-to-one or ‘numerical equivalent’ relationship with indices such as MSCI Singapore Index.

It does not mean that you can not trade an index using stocks. It can be done by looking at the historical prices of both indices over a specific period and then using them in your favour. You need to keep track of the historical prices and then understand how much a stock price moves when there is a change in the index.

In conclusion

Singaporeans need to be wary of these pitfalls, especially with the number of new investors on the rise. If you’re looking to invest in options trading or if this is your first time, make sure that you read up on key terms and conditions on all contracts before signing off. While it might seem trivial, having a basic understanding of how things work will give you more bargaining power when dealing with brokers. Remember, knowledge truly is power so take advantage while you can!

Vinay Kumar
Student. Coffee ninja. Devoted web advocate. Subtly charming writer. Travel fan. Hardcore bacon lover


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