Techniques to trade in the Asian options market
Options market trading is a unique type of professional trading where the investor has the right but not the duty to buy or sell assets at a pre-determined price. It is also known as “exotic options” and usually does not trade with mainstream financial instruments such as stocks and futures. Have a look at Saxo capital markets to understand what instruments are traded.
Mainstream traders who wish to take advantage of these complex contracts should understand their risk tolerance and investment goals before trading in the options market. The Asian Options Market (AOM) possesses unique characteristics difficult for new investors to understand. Newcomers curious about exploring this market could benefit from learning what makes it stand out from other markets and how to properly utilize available information sources when committing capital to a trade.
Image Source: Pixabay
Profit and loss
When trading in the AOM, financial professionals use this to track, estimate and predict available profit. This technique entails tracking previous trends to establish a baseline for future profits. It also requires researching current market conditions such as volatility and interest rates. Investors who wish to implement this approach should emphasize factual data rather than emotion-based decisions when choosing which stocks or contracts they will trade.
Maximize gains with “buy” options
Investors looking to take advantage of potential gains associated with Asian options should consider utilizing a “Buy” contract. Buy options allow the investor to purchase the underlying asset on or before expiration at a pre-determined price. For many traders, this instrument is one of the more accessible options when learning how to trade in AOM markets because buy contracts are not affected by swings in volatility that can dramatically increase losses for investors who do not understand how volatility works within these markets.
Maximum losses with “sell” contracts
Traders looking to minimize their exposure and lose as little capital as possible should utilize sell contracts in the Asian options market. This technique is often used when there are no short term gains to be made; using it will limit an investor”s loss to the premium paid for the contract and restrict profits. Sell contracts are only valuable when there are no fluctuations in volatility.
Exploit volatility fluctuations with “call” and “put” contracts
When there is a large amount of market movement, Call and Put options can be used to exploit this volatility so that investors have the opportunity to make substantial gains. Options traders often refer to these contracts as “directional” options because they do not require being correct about price direction; instead, it requires that a trader correctly anticipate a trade”s price point without worrying about actually owning or selling an asset. These instruments allow investors freedom from elaborate constraints while still allowing them to take advantage of fluctuating markets.
Taking advantage of currency shocks
Many traders are often surprised to discover that Asian options are more sensitive to changes in interest rates than the traditional options they trade on other exchanges. Because this market is so far-reaching, investors can utilize contracts that take advantage of currency shocks or benefit from hedging their portfolios against unpredictable fluctuations in exchange rates. These contracts require extensive research and monitoring for short term movements to decide which assets to buy or sell.
Utilizing intrinsic value
Many investors are unaware that Asian options contracts do not consider time value when determining price movement. The extrinsic value is based on the likelihood of a future event. In the options market, a trader pays a premium for the right to exercise their option any time before expiration. Therefore, the only relevant value in these types of contracts is the intrinsic value which is the difference between an option”s strike price and underlying asset. It does not matter whether or not they have correctly predicted the stock”s movement in either direction. They can estimate how much more or less valuable an option will be if certain conditions are met when executing trades.