When it comes to Singaporean derivative trading, there are two main types of securities that are most heavily traded: options and futures. But what’s the difference between these two, and which one is right for you? In this article, we’ll explore the key differences between options and futures trading in Singapore, so you can decide which type of security is best suited to your needs.
What are options and futures contracts?
An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specific date. A futures contract, on the other hand, is a legally binding agreement to buy or sell an underlying asset at a predetermined price on a specified date in the future. So, what are the key differences between options and futures trading in Singapore? Here’s a quick rundown:
- Futures contracts are highly standardized, while options contracts can be customized to suit the buyer and seller’s needs.
- Futures contracts are traded on exchanges, while options contracts can be traded over-the-counter (OTC).
- Futures contracts are regulated by the Monetary Authority of Singapore, while options contracts may not be.
- Futures contracts have a high degree of price transparency, while options contracts may not.
- Both futures and options can be traded on margin.
There you have it – a quick overview of Singapore’s key differences between options and futures trading. Now let’s take a closer look at how to trade them.
How do you trade futures contracts in Singapore?
Futures contracts are traded on exchanges, and the Singapore Exchange (SGX) is Singapore’s largest and most popular exchange. You’ll need to open a futures trading account with a broker that offers SGX-listed products when trading futures. You’ll also need enough money to cover the initial margin requirements for the contract you want to trade.
To start trading, you’ll need to choose a contract from SGX’s range of futures products. The most popular contracts are for commodities like oil, gold and silver, but there are also contracts for financial products like interest rates and stock indexes. Once you’ve chosen a contract, you’ll need to decide whether you want to buy or sell.
Futures contracts include a fixed price for delivery of an asset at a certain date, which can be plotted along a chart known as the futures curve. It’s important to remember that with a futures contract, you agree to buy or sell the underlying asset at a predetermined price on a specified date in the future. So, if the underlying asset’s price moves against you, you could lose money.
To help limit your risk, most brokers offer stop-loss orders for SGX-listed futures contracts. A stop-loss order is an order to buy or sell an asset when it reaches a specific price, and it can help you limit your losses if the market moves against you.
The benefits of trading in options and futures
Now that we’ve looked at the key differences between options and futures trading in Singapore let’s take a look at the benefits of each type of security.
Futures contracts offer a high degree of price transparency, as they’re traded on exchanges. It means that you know exactly what you’re paying for the contract, and there’s no need to negotiate prices with another party. On the other hand, options contracts may not be as transparent as they can be traded OTC.
Futures contracts are also highly regulated by the MAS, providing traders peace of mind. The MAS does not regulate options contracts, but this doesn’t mean that they’re riskier – it just means that there’s less regulation around them as they are not exchange-traded products.
Both futures and options contracts can be traded on margin, whether this is appropriate will depend on your risk tolerance and investment objectives.
The risks involved in trading in options and futures
Now let’s look at some of the risks involved in trading options and futures.
The first thing to remember is that with any security, there’s always a risk that the price will move against you. With a futures contract, you agree to buy or sell an asset at a predetermined price on a specified date in the future.
Another risk to consider is that futures contracts are highly leveraged products, which means you can control a prominent position with little capital. While leverage can amplify your profits, it can also amplify your losses. So, it’s vital to use stop-loss orders to limit your risk.
Finally, it’s worth remembering that the MAS does not regulate options contracts, and it doesn’t mean that they’re riskier, but it does mean that there’s less regulation around them. If you’re thinking of trading options, understand the risks before starting.