Options trading is a popular investment option in many countries around the world. However, it’s not so common in Hong Kong. There are several difficulties associated with options trading here. This article will explore the difficulties of options trading in Hong Kong and why investors choose other asset classes instead.
Call and Put Option
You might wonder how to option trade? First, we need to know what they are.
The main two types of options are calls and puts.
Calls allow the holder to buy an underlying asset at a predetermined price, while put holders can sell an underlying asset at a predetermined price.
When used by professional traders, they can be very profitable if used correctly; however, it is easy for amateur traders to make mistakes that could lead to significant losses instead.
One of the reasons behind this is that many people don’t know how to calculate the value of options.
For example, when looking at a call option that gives them the right to buy 10000 stocks in bank A at HK$5 each, they don’t know what 10000 stocks in bank A is worth. However, if investors do their research and use an options calculator (like this one), they can get accurate calculations before trading.
Another reason Hong Kong doesn’t have many professional options traders is because brokerage fees are very high here. The costs associated with commissions, exchange fees and stamp duties all push up the price. It’s also difficult for Hong Kong investors to take full advantage of tax allowances on capital gains, making investments through overseas brokers more attractive.
Hong Kong investors who like Options look towards Forex and CFDs (Contracts for Difference) instead. These allow investors to speculate on currencies and commodities with a relatively small up-front investment which can be more or less risk-free, allowing them to diversify their portfolios.
Call holders
If you purchase a call, you agree to buy the stock at a specific price in the future. The upside potential is endless, and the premium you paid represents the worst-case scenario. You want the price to rise significantly so that you may buy it at a lower rate.
Put holders
When you buy a put, you’re buying the right to sell a stock at a specific price. The difference between the stock prices (for example, if you acquire the right to sell at $5 per share and it subsequently falls to $3) is known as the upside potential. The premium you paid is the downside risk. You want the price to drop significantly so that you may sell it for a more significant profit.
Call writers
The upside potential is known as the premium; the danger is incalculable. You don’t want the price to drop too much because if someone purchases your call, you are forced to sell it.
Put writers
The premium is the profit potential, whereas the stock’s value is the loss potential. You want the price to be higher than the strike price so that when you need to sell, you may do so at a greater price than the stock’s current value.
To summarize, if you buy an option, the premium you paid represents your potential downside. If you sell a call, there is no limit to the amount of money you may lose; your potential loss is limited to the stock’s value if you sell a put.
The Hong Kong Stock Exchange has been on fire, with substantial Chinese money pouring into the market. Consider that today’s price increase and increased volatility are not based on reality if you’re an investor seeking to play for the long term.
Investors should exercise caution when making judgments based on price changes rather than corporate earnings and economic circumstances.
Investors must determine which approach to the Hong Kong Stock Exchange is best based on their needs, expectations, and comfort levels.
