Options trading has arrived in the GCC. But what exactly are options, how do they work, and is options trading suitable for regular investors? This beginner's guide answers every question clearly, honestly, and without jargon.
What is an Option?
An option is a financial contract that gives you the right but not the obligation to buy or sell a specific stock at a specific price, on or before a specific date. You are not required to exercise this right. You are simply purchasing the possibility of doing so.
Think of it like this: imagine you want to buy a house that is currently priced at 1,000,000 SAR. You are not sure if you want to commit yet, but you are worried the price will rise. So you pay the seller a small fee, say 20,000 SAR to 'lock in' the right to buy that house at 1,000,000 SAR for the next three months.
If the house rises to 1,200,000 SAR, you exercise your right and buy it at the lower locked-in price. If it falls to 900,000 SAR, you simply walk away, losing only your 20,000 SAR fee. That fee is what traders call a 'premium.' That contract is, in essence, an option.
The Two Types of Options: Calls and Puts
Call Options — The Right to Buy
A call option gives you the right to buy 100 shares of a company at a fixed price (called the 'strike price') before the option expires. You buy a call option when you believe a stock's price will rise.
Example: Apple is trading at $220 per share. You buy a call option with a strike price of $230, expiring in 60 days, for a premium of $3 per share ($300 total for 100 shares). If Apple rises to $260, you can buy 100 shares at $230 and immediately sell them at $260, a profit of $30 per share minus your $3 premium = $27 per share, or $2,700 total. If Apple stays below $230 at expiry, your option expires worthless and you lose your $300 premium.
Put Options — The Right to Sell
A put option gives you the right to sell 100 shares at the strike price before expiry. You buy a put option when you believe a stock's price will fall or when you want to protect (hedge) an existing position you already own.
Example: You own NVIDIA shares but are worried about a short-term drop. You buy a put option with a strike price of $100. If NVIDIA falls to $80, your put option is worth $20 per share, effectively protecting your downside. If NVIDIA stays above $100, you lose your premium but your shares are unaffected.
Key Options Terminology Every GCC Investor Should Know
Premium: The price you pay for the option contract. It is your maximum possible loss when buying options.
Strike Price: The agreed price at which you can buy (call) or sell (put) the underlying stock.
Expiration Date: The date by which you must exercise your option or it expires worthless.
In the Money (ITM): A call option is ITM when the stock price is above the strike price. A put is ITM when the stock price is below the strike price.
Out of the Money (OTM): The opposite, a call is OTM when the stock price is below the strike price.
Contract: Each standard US options contract covers 100 shares of the underlying stock.
Implied Volatility (IV): A measure of how much the market expects a stock to move. Higher IV means higher option premiums.
Why Do Investors Use Options?
Options serve several different purposes depending on the investor's goals:
1. Speculation — Amplify Returns with Less Capital
Because you are controlling 100 shares with a fraction of the cost of buying those shares outright, options can dramatically amplify returns. A 10% move in a stock can produce a 50-100% return on a well-chosen option. However, the reverse is also true, the option can expire worthless, resulting in a 100% loss of the premium paid.
2. Hedging — Protect an Existing Portfolio
Professional and institutional investors routinely use put options to protect large stock positions from downside risk. This is known as a 'protective put' strategy, and it functions like insurance on your portfolio.
3. Income Generation — Covered Calls
If you already own 100 shares of a stock, you can sell a call option against those shares, a strategy called a 'covered call.' You collect the premium as income, accepting the obligation to sell your shares at the strike price if the stock rises above it. This is one of the most conservative options strategies and is widely used by long-term investors.
What Are the Risks of Options Trading?
Options carry significantly more risk than simply buying and holding stocks, and they are not suitable for all investors. Key risks include:
Total loss of premium: If your option expires out of the money, the entire premium is lost. This happens frequently for speculative options positions.
Time decay (Theta): Options lose value as they approach expiration, a phenomenon known as 'theta decay.' This means holding an option for a long time without the stock moving works against you.
Complexity: Options pricing involves multiple variables (the underlying stock price, strike price, time to expiry, implied volatility, and interest rates). Misunderstanding these can lead to unexpected losses.
Leverage risk: While leverage amplifies gains, it equally amplifies losses in wrong-direction positions.
Options trading is best approached as a gradual learning journey. Start by understanding calls and puts on paper before committing real capital, and never invest money you cannot afford to lose.
How to Start Trading Options from Saudi Arabia
Options trading on US stocks is now available to GCC investors through Raseed, one of the very few DFSA-regulated platforms in the region to offer this product. Pricing starts at $0.99 per contract with a minimum charge of $1.49 per order among the most competitive options trading fees available to GCC retail investors.
To get started: open your Raseed account, complete identity verification, fund your account, and navigate to the options section of any US stock you want to trade. Select your call or put, choose your strike price and expiry, and review the premium before confirming.
Disclaimer: Options trading involves significant risk and may not be suitable for all investors. This article is for educational purposes only and does not constitute financial advice. Please ensure you understand the risks before trading options.