The world of options trading in Singapore is an exciting and dynamic one. With its high potential for returns, many traders are attracted to this market. However, with great reward comes significant risk. Traders need to have a risk management strategy in place to protect themselves from potential losses.

One effective way to manage risk in options trading is through hedging strategies. Hedging involves taking on additional positions to offset the potential losses in an existing position. This article will discuss hedging methods traders can use to reduce risk in their options trading portfolios in Singapore.

Long put

The long put is a hedging strategy that involves buying put options on the same underlying asset as the one in the existing position. By purchasing a put option, the trader can sell the underlying asset at a predetermined price (strike price) within a specific period (expiration date). It protects the trader from potential losses if the market moves against their existing position.

The long-put strategy is advantageous when the trader expects a significant downward movement in the price of the underlying asset. In this case, if the market moves downwards, the profits from exercising the put option can offset any losses in the existing position.

However, if the market moves upwards and the put option expires worthless, the trader only loses the premium for purchasing the option. This limited risk makes the long put a popular hedging strategy among options traders in Singapore.

Traders can check market movements and execute long-put strategies through reputable brokers such as Saxo Bank.

Short call

The short call is another standard hedging method used by options traders in Singapore. It involves selling call options on the same underlying asset as their existing position. By selling a call option, the trader must sell the underlying asset at a predetermined price (strike price) if the option is exercised.

This strategy is effective when the trader expects minimal or no movement in the price of the underlying asset. If this prediction is correct, then they can keep the premium received from selling the call option as profit. However, if there is a significant upward movement in the market, the trader may have to sell their underlying asset at a lower price than the current market price. In this case, the profits from exercising the call option can offset any losses in the existing position.

Collar

The collar strategy involves buying a put option and selling a call option on the same underlying asset. This combination limits both potential gains and losses for the trader. The put option provides a floor to protect against downward movements in the market, while the call option acts as a cap on potential gains.

The collar strategy is suitable for traders who have an existing position with significant unrealised gains but want to limit their downside risk. By selling a call option, they can generate additional income to offset potential losses from the existing position. However, if the market moves significantly upwards, the trader’s gains will be capped at the strike price of the call option.

Protective put

The protective put strategy is similar to the long put, except that it involves buying a put option on the underlying asset of a current position. This strategy provides downside protection if the market moves against the existing position.

The protective put is beneficial for traders who have a long-term bullish outlook on stock but want to protect themselves from short-term price fluctuations. If the market falls, the profits from exercising the put option can offset any losses in the existing position. However, if the market rises, the trader can continue to hold onto their long position and potentially benefit from further gains.

Married put

The married put is a variation of the protective put strategy, where instead of buying a single put option, the trader purchases both a stock and a corresponding put option on that stock. This strategy provides the same downside protection as the protective put, with the added benefit of owning the underlying asset.

The married put is suitable for investors with a long-term bullish outlook on stock but want to protect themselves from short-term price fluctuations. By owning both the stock and put option, they can continue to hold onto their position while also having a hedge in place.

Bear put spread

The bear put spread strategy involves buying a put option with a lower strike price and simultaneously selling a put option with a higher strike price on the same underlying asset. The premium obtained from the sale of the option with a higher strike price mitigates the expenses associated with acquiring the one with a lower strike price.

This strategy is practical when the trader expects a moderate downward movement in the market. If this prediction is correct, they can profit from both the put options, with the premium received reducing their overall cost. However, if the market moves upwards, they may incur losses on the higher strike price option.