Several financial products have been created to serve a particular purpose in finance. One such product is the options market. Options have become a significant part of many investment portfolios as they provide various investment opportunities and risk management strategies when you buy options in Singapore.
At the same time, options do not always provide equal value compared with other types of investments in Asia. Specifically, options on private companies (or unlisted stocks) often present substantial differences compared to listed derivative instruments.
While these two types of contracts share some similarities, there are essential differences between them that you are required to know before making an investment decision. A deeper understanding can help investors identify which option strategy will best meet their objectives, covering exposure or hedge risk.
This article will present seven significant differences between options and listed options in Asia.
Contract multiplier
A contract multiplier is used with listed options to determine the size of a position. With private company options, this multiplier is not applicable as it considers several indicators that are not relevant – such as the market value of the underlying stock.
American Style or European Style contracts
Investors choose between two types of contracts when buying or selling listed options: American Style or European Style. These styles refer to how long an investor has until expiration before deciding whether they want to exercise their right (of which there is only one). Private company options do not follow these rules and offer only one set of terms and conditions under which your investment decision should be made. This difference provides more flexibility for private company option buyers and allows them to control the specifics of their investments.
Pricing difference
The pricing of listed options contracts usually follows a set pattern or formula, which investors can use to decide how much they wish to pay for an option contract. It’s not the case with private company options with no predetermined prices. Instead, these contracts are priced based on several factors, including movement in the share price and market sentiment towards that particular stock or sector. Because private companies can be volatile at times, this arrangement works better as it provides more flexibility according to individual circumstances.
Intermediary vs no intermediary
When buying listed options, there is always an intermediary involved who facilitates the transaction between buyer and seller, whether an investment bank or brokerage house. Private company options deal directly between buyers and sellers without an intermediary. It results in fewer legal fees, faster settlements and transactions, especially when buying options through a broker who is also helping to manage the transaction.
Exercising rights immediately or at anytime
A listed option gives investors a choice between exercising their rights immediately or at any time up until expiration. One of the key differences between private company options is that they do not offer this same flexibility. All purchase decisions must be made before expiration (compared with listed options). Investors can still sell their unexercised rights by hedging themselves using other types of contracts, but this will affect how much money they make entirely.
Share price movements
The share price movements that affect listed options are based on whether or not stock prices meet specific predefined targets – which can be helpful for investors who are considering purchasing a listed option. However, private company options do not have any such influences. Their share prices can fluctuate following several other factors, including what is going on with the overall market, the industry these companies operate in, and even whether significant shareholders decide to sell their shares.
Double-digit return vs 5%
Listed options generally have a double-digit percentage return on investment compared with private company options, which can struggle to offer more than 5% returns due to their volatile nature. However, this return rate is only spread over a limited amount of time as both types of contracts expire at some point. This difference means that it will take far longer for an investor using private company options to make a good return on their initial investment.