Options trading has gained popularity in the past two decades after significant stock exchanges around the world started offering options contracts.
Options are not just available for stocks but also warrants, futures and other derivatives.
Options allow investors to gain exposure to any asset without actually owning it.
Investors who believe that the price of a security will increase by expiration time can buy calls or puts.
In contrast, opposite positions can be taken if one considers that security’s price will decrease over time.
Rings give their holders the right but not obligation to purchase securities at strike price whilst putting its buyers an obligation to sell underlying assets at the strike price before the expiration date.
The option mentioned above strategies are considered cash-settled as opposed to physical-settled.
Cash-settled contracts are those in which the underlying asset is not delivered to the buyer on expiration. Still, the difference between the security buying and selling price is paid out in cash.
There are two types of options trading: American style and European style. The former gives buyers the right to exercise their options at any time before expiration, whilst the latter can only be exercised at the expiration date.
The first type of options contract was introduced in America in 1871, whereas the European variant was first traded in Holland in 1963.
Options are available for many assets nowadays, such as stocks, indices, currencies and commodities.
However, there is a significant distinction between listed options and those traded over-the-counter (OTC).
Listed options are those that are traded on an exchange, such as the Dubai Financial Market (DFM), while OTC options are those that are privately negotiated between two parties.
The main advantage of listed options is that they offer greater liquidity and transparency than OTC contracts. This is because the prices of listed options are easily accessible to all investors, whereas the costs of OTC contracts are usually known only to the involved parties.
In MENA, listed options started trading in 2009 when DFM launched its derivatives market. The following year, DME followed suit by introducing listed options for Brent crude oil.
However, the uptake has been relatively slow due to a lack of awareness and education about these products.
This is slowly changing as exchanges in the region are doing more to promote options trading. For example, DME has been running roadshows across the globe to educate investors about the benefits of options trading.
So far, listed options have been mainly used for hedging purposes. However, there is potential for greater use of these products in the future as investors become more familiar with them.
Advantages
Options trading has many benefits over other forms of investment.
These include:
- Allows investors to gain exposure to any asset without actually owning it.
- Gives investors the right but not obligation to purchase securities at the strike price.
- Can be used for hedging purposes-Offers greater liquidity and transparency than OTC contracts.
- Has potential for greater use in the future as investors become more familiar with it.
So, which type of option is right for you?
Well, that depends on your individual needs and goals. If you are looking for a lower risk investment with liquidity and transparency, listed options may be the right choice.
If you are looking for a more speculative investment with the potential for higher returns, then unlisted options may be a better fit.
As with all types of investing, it is essential to do your research and understand the risks and benefits of each type of option before making any decisions.
Listed options may be the right choice for you if you look for a lower risk investment with liquidity and transparency. In contrast, unlisted options may be a better fit if you are looking for a more speculative investment with the potential for higher returns.
Ultimately, it is essential to do your research and understand the risks and benefits of each type of option before making any decisions. There is more info here.
