Common options trading mistakes to avoid in Asia

It can be pretty easy to get turned around when trading options in Asia. This is particularly true because the common mistakes made by traders vary according to whether you are trading on an Asian or American options exchange.

Options trading mistakes are common in many types of markets, but there are some specific pitfalls to avoid in the Asian market. While every trader is different and has their strategy, here are six common options trading mistakes to avoid in Asia.         

Ignoring transaction costs

The first mistake that inexperienced traders make is ignoring transaction costs. If you’re trading on an American options exchange, then those transaction costs shouldn’t be too high – as there tends to be low spreads and commissions. However, if you’re trading on an Asian option exchange, it’s very easy for these costs to eat substantially into your profits.

Not accounting for price decay

The second mistake inexperienced options traders make is not accounting for price decay. If you take an American option contract, then there is no decay (i.e., time-decay does not impact the value of this contract). However, if you look at any Asian option, especially on futures exchanges, this will almost certainly negatively impact its value over time. 

Knowing when to exit

The third mistake that traders often make relates to what happens when their trade goes “awry”. Even though an American trader may be able to exit out of their position before expiration, it may not be possible by using a similar trade-in Asia. 

Ignoring expiration

The fourth mistake that traders often make is ignoring the fact that expiration arrives. Just because you’re trading on an Asian exchange doesn’t mean that your options will expire at a different point in time. It’s still possible for all options trades to expire on the same day.

For example, a Singaporean investor who had bought over 30 call options contracts on Swiber Holdings Ltd. (S52) that were listed without any expiatory date was very disappointed when the stock plummeted by 40% after half a year. He lost S$5,000 (US$3,869) per lot. An option listing without an expiry date still comes with a deadline of 30 days, and if it is not exercised before the date, the option will expire. 

Not paying attention to the movements of Asian exchanges

In Australia, there are two exchanges that handle options trading: ASX and Chi-X Global. While they may be similar in that both offer exchange-traded contracts (ETCs), they differ. There are not as many options exchanges in Asia compared with other countries worldwide. The most popular ones include Singapore Exchange Ltd., Hong Kong Exchanges & Clearing Ltd. and Bursa Malaysia Berhad.

Taking too much leverage on a single trade     

When a trader takes on too much leverage, he must be careful. For example, if there are three lots of options bought on a single call option with a 100% margin requirement, the trader would need to have $60,000 (S$80,000) in his account without taking into consideration other trades. The more amounts traded and the less capital available, the bigger risk one can incur.

Summary

These are some examples of why many newbie option traders make common mistakes when trading in Asia. It’s important to remember that when trading options in Asia, there are always extra costs associated with this type of trading, such as commissions and the cost of any spread/trading. In addition, you need to consider whether or not it will be possible to exit your position before expiration arrives. 

And if so, what the potential return on investment might be in this particular scenario. New inventors are advised to use an experienced and reputable online broker from Saxo Bank; visit their website today for more information.