POEMS US Options Trading June 21, 2023
Table of contents
- 1. What is an Option?
- 2. Basic Options Strategies
- 3. Trading Options with POEMS
What is an Option?
An Option is a contractual agreement between two parties, the buyer and the seller. The contract gives the right to the buyer of the Option to buy/sell a certain number of underlying assets from the seller of the Option at the exercise (strike) price within a specified time in the future.
The buyer of the option holds the right, but not the obligation, to buy or sell the underlying asset within the specified time. The seller of an Option does not have such rights and can only assume that the obligation is as stipulated in the contract.
Upon purchase of a new car, it is necessary to purchase precautionary insurance before driving it. When purchasing an insurance policy, be it for automobiles, health, life, or home, a premium has to be paid to secure the provided coverage. This payment mirrors the role of the option buyer plays in the market. However, it is common for individuals not to require the use of their insurance, resulting in the insurance company retaining the funds paid. This reflects the role of the Option seller.
Basic Options Strategies
When you pay a premium for a long call option, it gives you the right to buy the underlying stock at a specific strike price stated in the call option. Calls may be used as an alternative to outrightly buying the stock. You can earn a profit if the stock rises, without taking on the downside risks that would result from owning the stock.
As seen in the profit and loss chart above, as the share price increases, the value of the Option will continue to rise; to an ideal level of unlimited profit. Subsequently, the risk for buyers of a call option is only limited to the premium paid on the call option.
A long put option gives you the right to sell the underlying stock at the strike price. The long put option can be used as an alternative to shorting the underlying stock. You can profit if the stock price drops, without taking on the downside risks that would result from shorting of the stock.
As seen in the profit and loss chart above, as the share price decreases, the value of the option will continue to rise; ideally to a level of unlimited profit or until the share price reaches 0. Subsequently, the risk for buyers of a long put option is only limited to the premium paid on the put option.
A covered call strategy involves selling a call option to collect premiums as income. However, for this strategy, you will need to have the underlying stock before you can execute this strategy. Selling a call option obligates you to sell 100 shares of the underlying, which would be a bad idea if you do not already own the shares. Without the shares at option expiry, you will be required to buy 100 shares from the open market, then deliver them to the option buyer at the strike price.
If you already own the shares of the underlying stock, and the call option buyer decides to exercise the option, you will be obligated to deliver the 100 underlying shares at the specific strike price. In this case, you will earn the premium of the Options and also the amount from delivery of the underlying at the strike price (this strike price can be your ‘take profit’ level for the underlying stock).
In another scenario, if the stock does not rise past the strike price and the call expires worthless, the seller of the call option will keep both the entire premium and the underlying shares.
A protective put strategy includes a long put option and a long position of the underlying shares. Buying a put option allows the buyer to protect the value of stocks already owned in the event of a systemic risk or company-specific risk. The long put position acts as insurance against a drop in the underlying share price.
With a long position in the underlying shares, profit will continue to increase as the share price increases. However, the losses will be limited as a put option is put in place (to safeguard in case of a fall in share prices). Therefore, this strategy is called the protective put as investors protect their long position using a put option.
A straddle strategy comprises a long call position and a long put position with the same strike price and the same expiration date. This neutral Options strategy is commonly utilized when the buyer of the Options expects a large price movement in the underlying shares in either direction which usually occurs during earning announcements with unpredictable results.
With a long position in both call and put, profit is virtually unlimited if the price of the underlying shares continue to rise or fall. The Straddle strategy will only profit if the underlying shares rise or fall from the strike price by a sum greater than the total premium paid.
Similar to any short-term call/put Options, Long-Term Equity Anticipation Securities (LEAPS) are Options contracts with a year or more till expiration. The benefit of LEAPS is that it closely mimics the stock price movement, allowing investors to benefit from potential price rises while utilizing less capital as compared to outrightly buying the stock.
LEAPS put is also used to hedge investors’ portfolios against any adverse market movement. This method of hedging is known as the protective put strategy mentioned earlier in this article.
For more information on POEMS Options Strategies, please visit our website.
Trading Options with your POEMS account
Minimum trade size: 1 contract which generally covers 100 underlying shares
For positions that cannot meet the obligation of the Options contracts (including auto-exercise) with the exposure risk deemed as excessive, POEMS will adopt one of the handling methods below. Any proceeds will be credited/debited to the client.
- Liquidate Options prior to the expiration
- Allow the Options to lapse
- Allow/take delivery and liquidate the underlying
POEMS does not allow the exercising of Options, all open positions should be rolled forward prior to the expiry of the contract; otherwise they will be force closed by end of the trading session on expiry day.
The US stock option tab will only reflect positions and balances relating to the US stock option. All trades are denominated in USD.
|Trading Lot (Minimum trade size)
|1 contract which generally covers 100 underlying shares
|Minimum bid size
POEMS Brokerage Charges
|$0.88 per contract, minimum $2.88 per order
|Securities and Exchange Commission (SEC) Fee
|0.0008% (sell trades only)
|Trading Activity Fee
|Applicable only for sell trades at $0.00244 per contract
$0.000145 per share, subject to maximum of $7.27
(for Assigned calls/ Exercised Puts on the underlying)
|Option Regulatory fee (ORF)
|$0.02905 per contract
|OCC Clearing Fees
|$0.02 per contract, subject to maximum of $55 per trade
|$2.00 per exercise/assignment.
|09:30pm – 04:00am (Daylight Saving Time)
|10:30pm – 05:00am (Non-Daylight Saving Time)
|US (Eastern) Time
|9:30am – 4:00pm
*Order placements are allowed only during regular trading hours, any order submitted outside of regular trading hours will be rejected.
|Option Settlement Date
|T+1 market days
|Underlying Settlement Date
|T+2 market days
1. Should the due date coincide with Singapore public holiday/s – The due date will follow the traded market’s due date
US Options Live Price
US Options live price feed is available for subscription FOR FREE on POEMS 2.0 if you are a non-professional investor. Each subscription is valid for 12 months.
Do note if you do not subscribe to the price feed, option prices displayed are delayed by 15-30 minutes.
Only the option prices are live, in order to have accurate IV/Delta/Gamma, investors are advised to subscribe to both US Equities and Options live prices.
How to open an Options account in POEMS 3: tutorial
How to trade US Options: tutorial
For more information about Options Trading on POEMS, you can visit our website, or reach out to our Night Desk representatives at 6531 1225. Don’t delay and start registering for the Options account right away
|Higher risk/reward ratioTime Decay
|Higher risk/reward ratioTime Decay
|Income from holding underlying or taking profit level
|Opportunity CostRisk of holding onto underlying shares whose prices are dropping significantly
|Insurance on holding underlying
|Total cost is increased by the premium of the put Options
|Anticipation of big moves in either direction
|High cost of premiumRequires large movement in the underlying share prices
About the author
Global Markets Desk US Dealing Team
The Global Markets Desk US Dealing team specialise in handling the US Markets in the Global Markets Desk.
Their responsibilities and capabilities extend from managing and taking orders from clients trading in the US market, to content generation, Technical Analysis and providing educational content to POEMS clients.