Chinese Stock Options Trading
Options trading has arrived in China. The Economic Times reports that stock options trading has begun in the Shanghai stock exchange.
China launched stock options trading for the first time on Monday, aiming to develop broader capital markets and give investors a tool to manage risk.
An option gives the holder the right to buy or sell an underlying asset, but - unlike futures - with the choice of whether or not to exercise the contract.
The Shanghai Stock Exchange held a ceremony for the launch of the options on an exchange-traded fund, the China 50 ETF. It tracks 50 of its largest listed firms, including banking giant ICBC and carmaker SAIC Motor.
State media have said options could cause greater market volatility, but in the long run may help investors hedge against risk and discover value investing.
This is a sign of a maturing stock market. It is also a matter of concern in a market that is prone to excessive optimism. Chinese stock market trading will indeed allow investors to contain risk but, as options traders know, risk is contained by purchasing options and risk can be multiplied by selling uncovered options.
A Hefty Margin Requirement
The Shanghai exchange will require options traders to hold the equivalent of $80,000 in their accounts in order to engage in Chinese stock options trading. Buyers of options contracts need only pay the required premium but sellers of options will need to have collateral in their accounts to cover potential losses.
A Learning Curve
Chinese stock options trading is a completely new thing for those trading the Shanghai market. The Chinese English language network, CNTV, gives viewers a little background on the development of options trading.
Options trading is a new tool in the Chinese mainland's markets. But options have long been a mature and popular way of investing in many parts of the world.
The history of stock options can be tracked back to as early as the 18th century. However, the first organized, standardized and government-supervised stock options market appeared in 1973 in the United States, which is now known as the Chicago Board Options Exchange.
At the very beginning, only buying and selling long were allowed. But from 1977, investors could buy and sell short on the CBOC. The New York Stock Exchange also launched stock option trading in 1982.
In Europe, the development of stock options started from 1978. In 1984, the London International Financial Futures and Options Exchange introduced the British FTSE 100 Index option. Options contracts in Europe grew quickly. From 1998 to 2008, the contract quantity in the region saw an almost ten-fold jump.
This is old news for traders in the West but necessary instruction as Chinese stock options trading attracts trading capital.
Calls or Puts
With the current state of the Chinese economy and Chinese stock market should options traders in Shanghai be buying calls or puts on stocks? The Shanghai market has had a great run up in the last six months. Many believe it is overpriced considering that the Chinese economy is cooling off and a weak global economy has reduced demand for Chinese exports. Likewise the Chinese real estate bubble is in danger of bursting.
A sharp slump in China’s trade performance last month is now ringing alarm bells about the overall health of the world’s second largest economy.
Figures released Sunday showed that Chinese exports fell in January by 3.3 percent from a year-ago levels, while imports dropped by 19.9 percent – their sharpest fall since the global financial crisis in 2009.
The news came against the backdrop of slowing GDP growth in China, which came in at 7.4 percent in 2014, the lowest expansion in 24 years.
This composite being the case smart traders will be more likely to purchase puts which will give them the right to sell stocks at a set price even if the market collapses. In addition anyone selling options contracts in Chinese stock options trading will need to follow the market closely to avoid huge losses if and when the market tanks.