Options mark significant expansion of traders’ toolkit

Source:Global Times Published: 2015-2-11 18:13:01

Early restrictions designed to keep risks in check

Illustration: Chen Xia/GT

Editor's Note:

China's derivatives hit a major milestone Monday with the start of options trading based on an exchange-traded fund (ETF) tracking the 50 most heavily weighted stocks on the Shanghai Stock Exchange (SSE50). This new tool marks China's first foray into options trading and many expect additional instruments to hit the market soon. The Global Times interviewed three experts to get their views on this topic.

Shao Yu, chief economist at Orient Securities

SSE50 ETF options are innovative financial derivative products which can provide investors with non-linear income. Their introduction marks an enlargement of China's risk management mechanisms as well as the further perfection of the country's capital market.

There is no doubt that options prices and trading data will provide a rich source of information for professional investors looking to gauge market sentiment and volatility. However, only very professional investors - most of whom are institutional investors - can make use of such information. Options are complex and highly risky derivative products. Most individual investors lack the ability or knowledge to make decisions based on options data.

SSE50 ETF options are unlikely to boost the stock market over the short term, since these tools are still new and it will take time for options trading to take effect.

Similarly, options will not divert money out of equities. There are heavy restrictions on trading such derivatives, while their relatively high risk will also keep large amounts of capital away. Regulatory hurdles block individuals from trading these instruments for the time being - only when investors become more mature and knowledgeable will they be allowed to buy and sell options.

Xu Zhiyan, managing director of Index Investment Department of Hua An Asset Management Co

SSE50 ETF options are important financial tools to promote China's capital market. Options will enable investors to better manage their portfolios by providing them with more flexible risk coordination tools.

Options are prone to volatility, but they aren't necessarily dangerous as long as investors understand how they work and use them in a rational manner. At first, these products will mainly benefit large institutions, such as market makers and privately offered funds. There will be a high threshold for use by individuals to protect them from risks.

Of course, options will help more than just big fund managers. In a larger sense, the government wants to provide more diverse financial tools to promote the development of a multi-tiered capital market.

On Monday, options made a smooth debut and did not lead to excessive market volatility or irrational speculation. This is because of strict policy restrictions, investor education and government supervision. The future of options depends on their subsequent pricing, market fluctuations and liquidity.

Market regulators should be very cautious in opening the door to options trading by individual investors, since most Chinese individuals don't have the ability to participate in options trading at present.

The market is eager to see the expansion of options trading to other securities, such as the SSE180 ETF as well as individual stocks.

Yu Pingkang, chief economist at Huatai Securities

Options trading is a double-edged sword for China's stock market. On the one hand, options can offer investors a way to hedge their risk exposure. On the other, options arbitrage could exacerbate market swings. Options are in an early stage of development and there are still uncertainties concerning their long-term impact on the market.

For a few reasons, it will take a long time for China's options trading market to grow. First, the market is limited to only a handful of selected participants since current restrictions bar individual investors from trading options. Second, a lack of market diversity means most traders will share the same tolerance for risk and make similar judgments about market trends. This convergence will invariably dampen trading volume.

Options price shifts will help investors anticipate movements in the financial market. This will enhance pricing efficiency.

Options will not necessarily bolster stock prices, since they will not lead to new capital inflows. Options are different from margin trading, which has attracted substantial amounts of money. The risks and restrictions on options make them less attractive and less accessible to investors. Only large capital inflows will stimulate stocks.

Options for the SSE50 ETF will enhance the appeal of blue-chip stocks included in the fund. SSE50 ETF options will also accelerate the use of options in the over-the-counter market as well as options for stock indices, commodities and foreign-exchange products.


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