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Looking for a less risky trading alternative? Have a look at options…

by , 29 April 2015

Options trading is by far the most popular trading tool in the US. As a South African trader you can trade this popular instrument too.

The Johannesburg Stock Exchange's Derivative Market lists options on the single stock futures it lists.

So what exactly is an option? And how much risk do they come with?

Let's take a closer look…

What are options?

In South Africa, options are listed on the underlying single stock future, which is listed on the underlying shares.

As one single stock futures contract is equal to 100 underlying shares, one options contract is equal to 100 underlying shares.

Simply put, an option conveys to its holder the right, but not the obligation, to buy or sell a single stock future at a fixed price in the future.

There are two main types of options: Calls and puts.

You buy call options if you think the underlying share is going to rise in value. And you buy put options if you think the underlying share is going to fall in value.

How the risk with options differs from other derivatives

What makes options trading different from trading derivatives like single stock futures is you don’t have an obligation to the trade.

When placing a trade, you pay a premium. If later on, your trade doesn’t work out as you think it would, you can just do nothing.

If you do this, all you lose from your trade is the premium you paid. This means that when trading options, you know from the start what your risk is.

By trading options, you can still gain from the magnifying effect of trading on margin through single stock futures, but only risk the premium you pay.

So there you have it. Why options are a less risky trading alternative to consider.

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Looking for a less risky trading alternative? Have a look at options…
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