The options market in the UAE promises a lot of excitement and potential for those who take the time to understand it. However, before exploring what makes this market great, we first need to know what an option is and how it works.
An options contract gives the buyer of that contract the “option” or right but not the obligation to buy or sell a specific financial instrument by a certain date at a set price called “the strike price.” The underlying financial instruments can include stock indices, stocks, currency pairs such as USD/CAD, commodities such as gold or silver, property indexes and even simple contracts between two parties. One party is the buyer, and one is the seller.
In Dubai, traders often buy options to speculate on company stock or index value. If they think that a share price will go up, they will buy a call option contract. Contrarily, if they believe a share price will drop, traders can buy a put option contract instead. The strike price defines how much it would cost to exercise an options trade, which means buying or selling an underlying asset at a specific agreed-upon price. Once you have determined whether you want to purchase or sell an option, this comes into play.
Once you purchase an options contract, the only thing that matters is what happens with your target asset until maturity.
Buy a long call
If you buy a call option, you want the price to go up. Your underlying asset must move beyond the strike price to make money on this contract. Remember, though, if it does go past that point, the buyer has the right to exercise their contract and take delivery of your shares at the agreed-upon price; this is called “exercising.” Their loss is limited by how much they paid for an options trade when they make this decision. In essence, your risk in buying a call is whether or not prices will rise rapidly enough before the expiration date for you to make a profit on exercising it.
Buy a long put
If you purchase a put option contract, you want the underlying asset’s price to drop. If the price decreases enough, you will be able to exercise your contract and sell shares at a profit. In essence, this increases the gain on shorting the underlying asset instead of just selling it outright.
Sell naked calls
Suppose you sell a call option without owning the security itself. In that case, you want prices to go down and stay there until expiration because the buyer of your contract “calls” those shares from you and receives any gains or losses associated with that security upon exercising their options trade. The risk involved here is that prices could rise rapidly before expiration and leave you forced to buy at higher prices than anticipated, thus losing money instead of making it.
Sell naked puts
The concept of “selling naked” is identical with puts as with calls, except you bet on prices staying the same or going down instead of up. The risk here is the same as with selling naked calls.
Buy a long future
Buying a futures contract gives you the right but not the obligation to take delivery of an asset in the cash market at a specific date in time. It can be used when you believe that your target stock or index will appreciate beyond its limit before near term expiration, allowing you to make money by taking delivery later for more than what you paid for the contract.
The risk here is that prices could decrease, leaving you having to buy it at a lower price than anticipated, later on, thus resulting in lost money instead of an opportunity to make more.
Sell a call spread
You receive a premium upfront by selling a call, and your maximum gain is limited. If prices go down, you will have made money because there is no exercise or assignment feature associated with this technique. The risk here is that prices could rise before expiration and leave you unable to sell your stock for more than what was required from the buyer of your option contract, thus losing money instead of making it.
You can find a Saxo fx broker UAE here.