The spike in market volatility due to the ongoing economic turbulence and several market challenges in relation to interest rate hikes and inflation could reign supreme once again and dominate the headlines as investors worry about the potential for more trouble rippling through the market.
Trading in today’s market environment requires agility and the willingness to adapt to the market changes and because of that, it is very important that the brokerage platform you are using is able to support your needs.
I have previously covered uSMART in my articles (here and here) which discussed about their unique key features and my personal experience in using them. This time, I want to highlight another two key features of their platform which they recently added and improvised – which speaks highly of their team’s willingness to innovate and improve their product and also the main reason why I remain committed to using uSMART as one of my main choices of brokerage platform.
Options has been around for many years, but it only started to get their deserved attention in the past couple of years.
It has become such a leveraging power (pun intended) that many investors are embedding options as part of their overall portfolio strategy. By leveraging on the right strategy, options can also have the potential to deliver higher percentage returns for investors regardless of whether the market is moving up or down.
uSMART covers a variety of option features – plain, covered calls, vertical spreads and most recently, straddle and strangle – reducing the margin requirement and allowing investors to take advantage of their capital.
Among the few, one of my favourite is the vertical spread option strategy, which I will go through here in detail.
There are two types of the vertical spreads:
- Call Vertical Spread
- Put Vertical Spread
A put vertical spread is a bullish option strategy which involves buying a long and short position in a put option.
When you establish a bullish position using a credit put spread, the premium you pay for the option purchased is lower than the premium you receive from the option sold. As a result, you still generate income when the position is established, but less than you would with an uncovered position.
Let’s take a look at the chart below:
i.) Buy put at strike price A
ii.) Sell put at strike price B
Max Profit: Net premium received
Max Loss: Strike Price B less Strike Price A less net premium received
The sweet spot: You would ideally want the stock to be at or above strike price B at expiration.
A Put Vertical Spread is an alternative to the sell put strategy, but with limited risk (and also upside as a trade-off). A naked sell put strategy has a very large loss to stomach in play as the underlying can go down all the way to $0 (technically, it is unlikely to go to zero, but a severe market reaction can push it down really hard).
With the vertical spread strategy, you are still getting your premium from selling a put at strike B but limiting your risk with strike A if the stock goes down.
At other lesser brokers, opening one buy and one sell put option positions like above will require you to put up TWO sums of maintenance margin. However, uSMART allows you to offset the margin requirement from both positions partially, freeing up your precious capital for other things!
Case Study: Tesla Inc (Nasdaq: TSLA)
Let’s explore this on a real case study with Tesla (Nasdaq: TSLA).
Assume I am generally bullish on the stock but at the same time I am also wary that the stock market might dive at any moment hence I will want to also hedge and limit my downside at the same time.
Assuming Tesla is currently trading at $180 as of writing (this was written before the earnings announcement, but the concept remains the same) and I am using the 26 May 2023 expiry, which gives us approximately 40+ days to expiration (you can adjust your timeframe to shorter or longer depending on your comfortability). I will take a position on:
- Sell Put at strike $180, I will receive a premium of $14.25 – which at 100 shares give me a $1,425.
- Buy Put at strike $170, I will have to pay a premium of $10.00 – which at 100 shares I will have to fork out $1,000.
The net premium received less paid will be at $1,425 – $1,000 = $425, which I pocketed upfront (cashflow positive). Note: I am doing a very conservative approach to the strike price to illustrate but in real practice you may adjust the strike price to your comfort level.
Scenario 1: Tesla hits $181 (above strike B) on the 26th May 2023
Tesla hits $181 on the expiry (above my strike price at $180) which means my put expire worthless and I get to pocket the entire premium.
On the other hand, the put which I chose to go long at $170 also expire worthless since I get to sell in the market higher at $180.
My total profits would be $1,425 – $1,000 = $425
If you have been observant, you would quickly notice that the upside is capped after the strike price of $180.
Scenario 2: Tesla hits $165 (below strike A) on the 26th May 2023
We are not a fan of this scenario but let’s just assume the market does not move in your favour.
That would mean the put which I chose to sell at $180 will get “assigned” to me, but thankfully, I have earlier bought a put at strike $170 to offset and cover my downside.
Maximum loss here will be (Difference between strike price*100) – net premium = ($180-$170) *100 – $425 = $575.
If you have been observant, you would also quickly notice that the downside is capped after the price falls below the strike price of $170.
Scenario 3: Tesla hits $178 (between the strike prices) at expiry
I will still get my assignment at strike $180 but my long put at strike $170 will expire.
Hence, the total profit / (loss) would be Net Premium – (Difference Strike B – Market Price)*100 = $575 – ($180 – $178)*100 = $375 (Profit)
This is essentially a flat profit and loss scenario with the exception that you still get to pocket the premium from the earlier options you wrote. Not bad if the market decides to swing sideways because of indecision.
Where can you find Options Trading at uSMART App?
You can find Grid Trading at [uSMART APP -> Choose a Stock -> Trade -> Options Trading] as shown below.
You can even preview the impact of your margins and buying power before executing it to understand your risk exposure.
Grid trading is a systematic trading strategy (rules-based and automated) that allows both investors and traders to take advantage of the volatile markets. The advantage of this strategy is it involves setting predetermined prices for buy and sell orders, which are automatically executed, thus preventing human judgement such as emotions to take over control of your decision (although having said that, you can always still cancel your order if you decide to change your mind).
Let’s take a look at the two different scenarios and see how grid trading can benefit and play a role in each situation.
i.) In a trend market (either an upward or downward direction)
In a bull or bear market, the direction to which the market is trending signals an important sentiment to investors.
An ideal outcome of the grid trading strategy imposed on a trending market is when the price hits all your levels either on the top side or bottom half of the grids, but not both.
This way, you get to build up position and momentum as the stock goes in the direction of the trend.
For instance, Meta platform Inc (Nasdaq: Meta) has displayed a reversal of the trend since Nov 2022 and has since turned into an uptrend direction.
You can do the grid strategy by setting your initial base price at the current price, say at $215, and then put the conditional point spread at $15 for each grid (you can decide by how many grids you want to set up).
Should Meta platform fall to $200, a buy order will be initiated. The new base price will then be $200 in this case. From here, if Meta platform rises back to $215, a sell order will be initiated, and you will be able to lock in your profit on your previous batch at $200. The new base price will then be revised to $215 in this case.
If the stock goes up to $230, a sell order will be initiated, and the new base price will be $230, and so on.
This way, you will be able to take profit on every $15 movement on your grid, and multiply this by a good amount of shares, for e.g., 100 shares, will reap you a decent profit $15 x 100 shares = $1,500.
ii.) In a sideway market
While the market exhibits an uptrend over the long run, the market goes trading sideways more frequently than what we expect to.
In a sideway market, the buy order should be set below the predetermined reference price (e.g., if you are buying a stock worth $100, you can set your buy price say at 20% below which is at $100 – $20 = $80).
You can set a corresponding sell order which is set at the same spread range, which in this case is $100 x 120% = $120, unless you decide to change it otherwise.
To illustrate this, let’s take a look at Alibaba Group Holding (NYSE: BABA).
If you have been following the company for a while, you would notice that Baba has been trading sideways for quite a while now – with resistance and support standing in between $120 and $80 respectively (see chart below).
While it doesn’t always stay this way (at some point, it is going to break-out either to the upside or downside), it would be nice profiting from this range of play for as long as you can.
You can do the grid strategy by setting your initial base price at the current price, say at $100, and then put the conditional point spread at $20 for each grid (you can decide by how many grids you want to set up).
Should Baba fall to $80, a buy order will be initiated. This coincides with a strong support level. The new base price will then be $80 in this case. From here, if Baba continues to fall to $60, another buy order will be initiated.
On the other hand, if Baba decides to rise back to $100 instead, a sell order will be initiated, and you will be able to lock in your profit on your previous batch at $80. The new base price will then be revised to $100 in this case. If the stock continues to go up to $120, a sell order will be initiated, and the new base price will be $120, and so on.
Where can you find Grid Trading at uSMART App?
You can find Grid Trading at [uSMART APP -> Trade -> SMART Order -> Grid Trading] as shown below.
A good feature platform acts as a central source that standardizes workflows from design to production (user experience) and it also allows for ease of convenience (from depositing to withdrawing) to its users.
Since completing its series B funding in February 2021, uSMART has been on its toes to provide a variety of different add-on features to its users at no additional costs – Options Strategies & Grid Trading highlighted above are just a few of them.
Furthermore, with the recent cases surrounding a couple of crypto platform failures and bank run, investors might be wary of where they could safely park their money. It is probably worthy to mention and remind that uSMART Securities Singapore received regulatory approval for the Capital Market License (CMS) from MAS in December 2021, and any of the deposits and positions you have undertaken through uSMART securities are held through reputable custodian accounts.
Whether you are a seasoned investors or someone who is new to investing, there will be aplenty that uSMART can do more for you.
Smart trading. Easy investing.
Do use my referral link here and feel free to pop me any questions.
Disclaimer: This article is written in collaboration with uSMART Singapore. All views expressed in the article are the independent opinions of mine. This article is intended for information purpose only and should not be construed as financial advice. This article has not been reviewed by the Monetary Authority of Singapore.