Trading Asian options is an increasingly popular way of executing trades in the financial markets. Generally, it involves two parties agreeing to a trade that will complete sometime in the future. Many use this kind of trade because they cannot place trades using standard Western European or American times; for example, during their working hours between 9-5 pm London time.
The Asian options market is a unique and sophisticated investment vehicle that offers several benefits over traditional stock trading. The market’s main attraction is its ability to offer returns with limited risk and the opportunity for traders to place multiple trades from a single account.
Many people are unaware of this alternative marketplace or how it functions. For those who want to learn more about the opportunities presented by trading Asian options, keep reading to learn all you need to know.
What Are Asian Options?
Asian options aren’t really “options” at all – they’re more like non-directional futures contracts. Like futures, Asian option expiration dates range from as short as one day up to several years into the future. Also, like futures, these instruments are traded on margin, meaning traders can leverage their capital to increase the effective value of their trades while keeping the actual cash outlay very low.
Asian options also share another characteristic with futures: they’re susceptible to small movements in price. This is because the contracts involved are non-directional or not tied to any particular movement in market prices. These types of trades are ideal for investors who want exposure to volatility without risking directional risk – because the investment doesn’t move with price – and will profit from a change in option premiums without needing an underlying asset to appreciate.
Benefits of Asian options
The structure of Asian options makes them a good fit for many different trading styles. They can be used as an effective hedge against existing equity holdings, but they can also be traded like traditional options to anticipate directional price movement. Because these trades are non-directional, the risk is limited to the premium paid (assuming proper position sizing).
Drawbacks of Asian options
The main drawback to trading Asian options is that they’re not very liquid compared to other types of exchange-traded securities. This means that there’s less opportunity for making large profits on the market. However, the lack of liquidity makes Asian option contracts somewhat more attractive to professional traders who engage in arbitrage or hedging strategies because prices are much more likely to remain stable. That said, it’s still important for investors interested in this type of trade to understand how markets work so they know when opportunities are likely to arise.
Asian option trades are also highly sensitive to time decay. The value of all options contracts changes with time, but Asian options, in particular, lose much more value than traditional securities over short periods. If holding these instruments for more extended periods (weeks or months) is part of your investment strategy, this risk must be considered when placing an order.
Risks associated with the Asian options market
The best way to make money in any market is by understanding how it works and what opportunities are presented by its unique characteristics. Those who approach the Asian options market with a level head and sound trading strategies will find it full of possibilities beyond simple directional price movements.
New traders must remember that although these types of trades can work well depending on your strategy and approach, each one requires a lot more consideration than simply buying or selling. This means they are not for beginners, so only trade with reputable online brokers from Saxo Bank who have experience in this area; if you want to try these trades yourself, for more information, check this here.