Most people think of Saudi Arabia as an oil-rich country, and while that is undoubtedly true, the country has been making moves to become a more diversified economy. In options trading, Saudi Arabia is quickly emerging as a leader. This article will examine what drives this growth and how traders can get involved.
What is options trading?
Options trading is a type of investment that allows investors to purchase contracts that give them the right, but not the obligation, to buy or sell an underlying asset at a set price on or before a certain date. In Saudi Arabia, options trading is conducted on the Tadawul Exchange, the country’s primary stock exchange.
To trade options, investors must first open an account with a broker that offers options trading. Once an account has been opened, investors can place orders to buy or sell options contracts. When placing an order, investors need to specify the option type, underlying asset, strike price, and expiration date.
Options trading can be used for speculative purposes or hedging purposes. For example, an investor might buy a call option if they believe the underlying asset price will increase. Alternatively, an investor might buy a put option if they believe the underlying asset price will decrease.
The benefits of options trading
For many investors, the idea of options trading seems complex and risky. However, options trading can offer many benefits, especially for Saudi Arabian investors. When used correctly, options can provide a way to hedge against risks, generate income, and even speculate on future price movements. For example, by buying put options, investors can protect their downside in case of a market decline.
Meanwhile, call options can be used to speculate on a rising market. And finally, by selling options, investors can generate income from the premium paid by the option buyer. As such, options trading can be a valuable tool for any investor.
The risks associated with options trading
Options trading is a popular way to earn income, but it also carries a certain amount of risk.
The most common risks associated with options trading are market risk and credit risk. Market risk refers to the possibility that the underlying asset will move in a direction that is unfavourable to the trader. On the other hand, credit risk is the risk that the counterparty will not fulfil its obligation to fulfil the contract.1
There are a few ways to mitigate these risks. First, traders can use stop-loss orders to limit their losses in case the market moves against them. They can choose to trade with a Saxo broker in Saudi Arabia who can advise them. Finally, traders can diversify their portfolios by holding multiple contracts with different expiration dates and strike prices.
The different types of options contracts
There are two types of options contracts in Saudi Arabia: call options and put options. Call options give the holder the right, but not the obligation, to buy an asset at a specific price within a certain timeframe. Put options give the holder the right, but not the obligation, to sell an asset at a certain price within a specific timeframe.
Both options contracts can speculate on the future price movements of assets such as stocks, commodities, or currencies. Options can also be used as a hedging strategy to reduce risk exposure.
Examples of successful options trades in Saudi Arabia
Options trading has become increasingly popular in Saudi Arabia, and this is likely because options offer investors a high degree of flexibility and potential for profit. Below, is a look at examples of successful options trades that were made in Saudi Arabia.
Brent crude contracts
A successful options trade in Saudi Arabia took place in June 2019. At the time, tensions between Iran and the United States were high, and there were fears of a military conflict breaking out in the Middle East.
In response to these fears, many traders bought call options on Brent crude oil futures contracts, giving them the right to buy Brent crude oil at a specific price within a specific time frame. When it became clear that war was not going to break out between Iran and the United States, the price of Brent crude oil fell sharply.
As a result, those who had bought call options could make sizable profits.
Oil field attack
The third example occurred in September 2019, when an attack on Saudi Arabia’s largest oil field occurred. This event caused major disruptions to Saudi Arabia’s oil production and sent shockwaves through global oil trading markets. In response to this event, many traders bought put options on Brent crude oil futures contracts, and these contracts gave them the right to sell Brent crude oil at a set price within a specific time frame.
When it became clear that Saudi Arabia’s oil production would be offline for an extended period, the price of Brent crude oil surged higher. As a result, those who had bought put options could make large profits, because they believed that violence was about to erupt in the Middle East region due to escalating tensions between Iran and the United States. These traders could make large profits when it became apparent that war would not break out.