Article

What Bubble Tea Taught Me About Options Trading

This article is written in collaboration with Longbridge Singapore. All views expressed in this article are the independent opinion of The Simple Sum.For the longest time, I avoided it because it sounded complicated, intimidating and risky.Until a friend explained it to me… using bubble tea. And suddenly, everything made sense.I’m talking about options trading. It sounds totally foreign and complex, but after his explanation, I now find it easier to trade and have explored options trading as a tool for my trades.Here’s me sharing the easy-to-understand explanation. First, I’m thirsty, let’s buy a drink = The drink itself is the stockImagine walking into a bubble tea shop. Their bestseller, the Matcha Bubble Tea, costs $6 today.Normally, you’d just buy the drink and walk away, happily sipping it. But you just heard on the news that there is a matcha shortage in Japan. While the effects haven’t reached Singapore yet, and prices still look stable, you suspect that the calm might not last.That drink is the stock, and the $6 is the stock price.Then, you notice something interesting: For $1, the shop offers a voucher that lets you buy the same drink for $6 anytime – no matter what the price on the board states.But there’s just one catch: the voucher expires in one month. How to use that drinks voucher = How a Call Option worksAs you believe matcha prices will rise, you decide to buy the voucher for $1. And just like that, you’ve bought what is known as a Call Option.In options trading talk:- The $1 voucher is the Option Premium- The $6 is the Strike Price- The one-month validity is the Expiration DateYou can choose to buy the drink at that fixed price anytime, before the voucher expires in a month.How do you decide when to use the voucher?There are three ways this can play out:​ Deciding if it is worth buying those vouchers = The beauty and risks of OptionsLet’s unpack this a little bit. In both Scenario 2 and 3, if you don’t buy the drink, your loss is limited to the $1 premium you spent on the voucher. That’s basically the beauty of buying Options – your downside is capped.Okay, so how about the negative aspects of buying this voucher?Since your voucher expires in a month, you only have a limited time to profit. If the drink’s price doesn’t go up before then, the voucher will be worthless. Also, if the price rises after it expires, you won’t be able to use it.In these situations, time is not on your side. The clock is always ticking.In addition, your Option gradually loses value every day, even if the drink price doesn’t change. That’s because, as it gets closer to the expiry date, there is less time, and therefore a lower probability of a big price move from happening. This effect is known as Time Decay, or Theta. These are reasons why Options Trading can be considered high risk.You have used leverage to potentially earn, or lose money. You used a small amount of money ($1) to control something bigger (the drink’s fluctuating price). If the price rises, you benefit. But leverage works both ways, so, if nothing happens, you lose your premium. That’s the trade-off. Bubble tea shortage, OMG = Volatility can shake things upIf the matcha shortage finally makes its way to Singapore, it could greatly affect the price of the drink. The store might have to raise its price, discontinue the drink, or source the ingredient from elsewhere, potentially altering the taste of the product.Trends can also hit out of nowhere. Remember the Labubu craze? Lisa from the K-pop group Blackpink played a huge role in the plushie’s surge when she shared a picture of it on her socials. Now imagine if the hottest celebrity were to post about the drink, calling it the “Best Matcha Bubble Tea EVER!” You can bet there will be a queue the next time you visit the store.These sudden price jumps are volatility.However, these jumps can sometimes happen even before the shop officially opens. For instance, once news of a matcha shortage breaks, expectations change immediately, even though the store hasn’t updated its price board yet.Hearing this, a few eager patrons might gather outside the store, trading vouchers based on what they’ve heard. This is similar to pre-market trading, where investors react to news before the official market opens. It gives them a chance to position themselves early, before the full crowd enters and prices adjust.Options are generally influenced by volatility. The bigger the potential move, the more valuable your voucher becomes. For example, if the drink price rises from $6 to $7, you wouldn’t make anything (since you spent $1 on the voucher). But if it jumped to $20, you’d make $13, which is a 1,300% gain.On the other hand, if nothing exciting happens, the voucher becomes cheaper. Instead of costing $1, it might drop to $0.50 because the chance of making a big profit is low, so people aren’t willing to pay as much for it.  Think of it this way: if matcha prices don’t fluctuate, you wouldn’t have bought the voucher. That causes the demand for it to drop, along with its price.Options work the same way. Their value isn’t based on the current price of the drink (or stock), but also on the possibility of a big move. When markets are quiet and prices barely move, options tend to lose value. In short, options don’t just depend on direction – they depend on movement.Protecting the taste = Protect yourself with PutsNow we will discuss another aspect of Options Trading, which are Puts.While you love the Matcha Milk Tea at this store, they have a problem with consistency. Different baristas make the drink differently, and it can taste vastly different each time. You have tried to get a refund before, but the store has a strict no refund policy.  What if for $0.50, you can buy a refund voucher. This voucher allows you to get a full refund if the drink doesn’t live up to your standards, or if you’ve simply changed your mind, no questions asked.  So, the next time you buy a $6 drink and it doesn’t taste good, you can just whip up your voucher and get a full refund. Although you spent money buying this refund voucher, it protects you from losing the full amount you spent on the drink.This is exactly how buying a Put Option works in finance: You pay a small fee to have the right to sell an asset at a fixed price, even if the market value falls.It works just like insurance – you hope you won’t need it, but it’s still good to have it just in case.And just like Call Options, time and volatility matter in Puts. If you don’t use your voucher, you lose the money (or premium) you spent buying it. But if the market shows big movements, your vouchers can prove very useful. Summary: Options trading rethink, like how I like my favourite bubble teaAlthough we wish that our bubble tea shop could really sell us such vouchers so that we can beat inflation and price fluctuations, the reality is that shop owners tend to inflate prices without much discussion.Luckily for us, this is not the same when it comes to Options Trading. There are some aspects that manage price fluctuations and risks involved. In a nutshell, Options give you different ways to profit and protect your investments:- Calls: lets you profit if prices rise.- Puts: protects your assets or lets you profit if prices fall.- Together: you can use them separately or together to have more flexibility and control over your investment risks.And Options aren’t just about buying stocks – they’re about how the market moves.- How far the stock price might move- How quickly it moves- Will the change happen before your option expires- And is the potential gain worth the premium you paid for the voucher?Even if you’re right about the direction – predicting that prices will rise or fall – you can still lose money if the change is too small, or if it happens after your voucher expires. Options reward timing and precision. That’s just like how I time my occasional bubble tea indulgences - just the way I like it.A message from our sponsor:In trading, timing isn’t just important – it’s everything.Markets don’t wait. News breaks overnight. Earnings hit before dawn. Prices move long before the opening bell rings.Now, you don’t have to wait either.Discover Longbridge’s World’s First Pre-Market US Options Trading Platform, a brand-new way to trade select US stock options a full 5.5 hours before the US market opens.That means more flexibility to position early, react faster, and execute your strategy on your schedule.And for a limited promotional period, enjoy $0 commission^ and $0 platform fees* on all Pre-Market Hours trades (active until further notice).Because when timing matters, earlier can mean smarter.Meanwhile, if you sign up with Longbridge via this link, you can get up to SGD1370* in rewards, including:1. Lifetime $0 commission^ for US, HK & SG stocks2. Limited-time $0 commission† for US options (Valid until further notice)3. $0 platform fees* for US, HK & SG stocks (Valid for 90 days upon issuance of the platform fee coupons)4. Up to USD 100 (≈SGD120) Option Cash Coupons*（Applicable only to US option buy trades）5. Exclusive: 5% p.a. Interest Boost Coupon# on SGD 2,000 for 365 days6. Free NVDA/AAPL stocks worth up to SGD 1150*  *Terms and conditions apply. ^Other fees apply. †Limited-time offer, Platform fees apply #Only applicable to Cash Plus subscriptionsDisclaimerThis post is a paid partnership with Longbridge Singapore. It is intended for general awareness and does not constitute investment advice or a recommendation to buy, sell, or otherwise engage with any investment products or financial services. The presenter is not a licensed financial adviser and is not offering financial advice. All views expressed are solely those of the presenter and do not necessarily reflect the view of Longbridge Singapore.All investments carry risks, may not be suitable for everyone, and you may lose your investment principal. Past performance is not indicative of future results. You should seek independent financial advice if you are unsure about any investment decisions. This advertisement has not been reviewed by the Monetary Authority of Singapore.