Dubai is an exciting market for both position traders and options traders. The former are trying to catch the big moves, while the latter is playing out strategies that involve time decay or volatility contraction.
We will discuss how these two ways of speculating on stocks are different and their pros and cons.
Position Trading
More conservative than options trading, position trading involves buying and holding a stock hoping to benefit from significant price movements either upwards or downwards.
Generally, an investor would enter into a large number of contracts hoping that the price movement will be statistically significant enough to cover transaction costs and still give them a decent return.
One needs to balance the number of contracts and the price movement.
A position trader would strongly prefer to limit any open positions at the end of each day. If they expect a big move in either direction, they will hedge their existing positions by selling stocks or buying protective puts/calls.
If they wish consolidation or sideways movement, they might let their positions run for an extended period. It is generally not advised to hold onto large open contracts overnight.
The market tends to be more volatile during these sessions, and one has little control over his losses, especially if he is holding short options.
Options Trading
There are two types of options in Dubai: calls and puts. A call option allows the “caller” to buy an asset at a preset price by a specific time, while a put option gives the “writer” of the contract the right to sell an asset at a preset price by a particular time.
Each has its profit potential for each strategy based on market conditions; if investors believe that an investment will increase in value, they may choose to take outcall options. Alternatively, if they think it may fall in value, they might opt for buying put options instead.
The investor can also decide whether or not to exercise their rights depending on how much money is made after the expiration date and whether or not the market is in their favour.
Options trading involves speculating on future movements in stock prices with help from derivative contracts.
These contracts give the buyer the right, but not the obligation, to buy or sell a security at a set price on or before a specific date.
The main advantage of options trading is that it allows investors to control many shares with just one contract. This is known as leverage and can generate significant profits on small moves in stock prices.
However, this also means that investors can lose more money than invested if things go wrong.
Additionally, options contracts have a time value which means that they lose value as time goes on. So an investor who buys a call option at $1 and the stock price moves up to $5 would only be able to sell it for $4 even if he decides to exercise his right to buy the shares at $5.
The option contract will have less time value as the expiration date gets closer.
So which one is better?
Both position trading and options trading can be profitable if done correctly. However, there are some pros and cons of each approach that should be taken into account before making a decision:
Position Trading
Pro: Can be very profitable if done correctly
Con: Requires a large amount of capital to be effective and risky if the trade goes wrong.
Options Trading
Pro: Allows an investor to control a large number of shares with just one contract, thus generating large profits on small moves in stock prices.
Con: It can be precarious if done incorrectly.
Overall
Options trading is a more risky way of speculating on stocks than position trading. However, it also offers the potential for much greater rewards.
So it is essential to weigh the risks and rewards before deciding which approach to take. Dubai is an attractive market for both position traders and options traders, and each has its unique advantages and disadvantages.
So it is essential to do your research and find a trading style that suits you. Follow Saxo’s official site for more info.