China Options Debut Gives Traders Tool to Hedge Volatile Stocks
By Bloomberg News
(Bloomberg) — China started trading of equity-linked
options for the first time, giving investors a new tool to
manage risk in the world?s most-volatile major stock market.
Contracts on the China 50 ETF, an exchange-traded fund
tracking some of the country?s biggest companies, began changing
hands on the Shanghai Stock Exchange as part of a trial that
Haitong Futures Co. predicts will eventually expand to options
on equity indexes and single stocks. It?s the first new equity
derivative allowed by Chinese regulators since the 2010
introduction of index futures, a market that has grown about 10-
fold in the past four years.
China?s options debut, which comes 13 years after the
derivatives started in India, is part of the nation?s effort to
lure more sophisticated investors to a market where individuals
account for about 80 percent of equity trading and price swings
are the biggest among the world?s 15 biggest bourses. The
contracts will make it easier for institutions in the $5
trillion stock market to manage volatility after the Shanghai
Composite Index turned into this year?s worst-performing equity
gauge from the best performer in 2014.
?Launching its first option is a big step for China,?
said Winner Lee, an Asia equity-derivatives strategist at BNP
Paribas SA in Hong Kong. ?We can see Chinese leaders? ambition
to internationalize mainland shares and gradually build its
derivatives market.?
Structural Changes
China?s introduction of options follows a string of changes
to the nation?s stock market structure over the past five years.
Aside from index futures, policy makers have introduced short
selling, margin trading and a program for international
investors to buy local securities using yuan raised overseas.
The Shanghai bourse gave foreigners unprecedented access to
yuan-denominated shares in November with the start of the Hong
Kong exchange link.
?The focus is on attracting large institutional
investors,? said Freddy Lim, the global head of derivatives
strategy at Nomura Holdings Inc. in Singapore. ?To get to the
next phase with single stock options, the bellwethers such as
China 50 ETF options must first develop reasonable depth.?
If Chinese authorities do decide to expand the options
market, it has the potential to become the largest in Asia, said
Eric Ren, a Shanghai-based general manager at Haitong Futures,
one of the 10 brokerages granted a license to take part in the
trial of ETF options.
It may take as many as six months for
trading in the contracts to increase, with average daily
turnover climbing to as much as $150 million, versus about $400
million for the underlying ETF, BNP?s Lee said.
Uncertain Period
The Shanghai exchange will expand options trading to 180
ETFs and individual stocks, Oriental Outlook reported, citing
Liu Ti, director of the bourse?s derivatives business
department.
The HSI Volatility Index of Hong Kong-listed shares fell 4
percent last week to 15.01, the lowest level since Nov. 28. The
Chicago Board Options Exchange Volatility Index, known as the
VIX index, declined 18 percent to 17.29.
?We don?t expect that we will jump into the market
quickly,? said Brian Ingram, chief investment officer for Ping
An Russell Investment Management (Shanghai) Co. ?If I think
about it from the standpoint of most of my domestic clients, how
can I use this instrument to hedge my equity exposure, I think
we?re still in a period of uncertainty. I think there is a fair
amount of of risk about whether or not this instrument will be
able to achieve this goal in the near term.?
Chinese authorities are taking steps to avoid a repeat of
past experiments in derivatives that led to investor losses and
allegations of market manipulation.