To The Moon

Speaker: Benedict Lim, U.S. options trainer and host of one of Singapore's largest retail investor meetup groups, as he breaks down how options are priced and what to check before you trade one.

[About the Speaker] Benedict Lim is the host of one of the largest retail investor meetup groups in Singapore, and a stock market trainer on U.S. options with over 15 years of experience in the stock markets. He is also a veteran of the banking industry, having worked at top global banks including Standard Chartered, DBS and HSBC, with over a decade as a financial analyst, business analyst and wealth manager.

[The Hook] After the basics, a natural question: why do some options cost so much more than others? Benedict's answer split an option's price into two parts and then gave a short checklist of practical things to look at.

[Intrinsic Value: What It Is Already Worth]

Back to the house. Suppose you want the right to buy at S$800,000 when the market price is S$1 million. You cannot pay the same S$10,000 deposit for that, because the right is already worth at least S$200,000. That built-in difference between the current price and your strike price is the intrinsic value.

[Extrinsic Value: Time and Volatility]

The rest of the price is extrinsic value. Ben highlighted two main drivers (interest rates also play a part):

• Time. An option with one year left costs more than one with one month left. You are buying time, and more time means more chances for the price to move your way.

• Volatility. The faster and further a stock tends to move, the more expensive its options, because the chance of a big move is higher.

He also separated two kinds of volatility: historical (how the stock has moved in the past) and implied (a forward-looking measure of what the market expects).

[Buyer or Seller?]

He asked the room: is it better to be a buyer or a seller? The audience leaned towards sellers, who collect the premium upfront. Benedict agreed sellers have a higher chance of winning, since time passing is on their side, but he did not leave it there. Which side is better depends on the stock, the strategy and your goal, and above all on which one you are more comfortable with. High volatility favours sellers, who collect richer premiums. Low volatility favours buyers, since options are cheaper.

[Time Decay Is Not a Straight Line]

An option loses value every day, and the loss speeds up as expiry approaches. That is why timing matters so much for buyers. Even if you are right on direction, being right too late can still cost you.

[Liquidity: Can You Get In and Out Easily?]

Benedict also pointed to practical checks before trading an option:

• Bid and ask. The ask is the price you pay to buy and the bid is what you get when you sell. A wide gap between them is a hidden cost.

• Easy to open and close. You want a position you can enter and exit without trouble, so choose options that trade actively.

• Choice of expiries. If a stock has only a few expiry dates available, it is less suitable for traders. An investor looking for a single position may care less.

• He noted that the US options market is generally deeper than Singapore's.

[Key Takeaways]

• Price = intrinsic value + time and volatility.

• More time and more volatility mean a more expensive option.

• Neither buying nor selling is automatically better. Pick what fits your goal and comfort.

• Check liquidity first: bid-ask gap and available expiries.

[Call to Action 🎯]

1. Pick one stock and compare a one-month and a one-year option at the same strike. Note the price difference.

2. Look at the bid and ask for each. How wide is the gap?

3. Drop a comment: do you prefer being on the buying side or selling side of time decay?

Markets are always moving - and sometimes, the best move is knowing what works for you.

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