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China launches first equity options, investors bet stock prices to rise
[SHANGHAI] China launched its first stock options on the Shanghai Stock Exchange on Monday, offering investors a new hedging tool for trading index heavyweights, which regulators long have hoped to boost.
The options are based on the exchange-trade fund (ETF) that tracks the SSE50 index, composed of the 50 most heavily weighted stocks on the bourse. Regulators are essentially guiding investors into blue chips, which most retail investors have avoided in favour of smaller firms, whose valuations have been pushed up.
Components in the SSE50 index have average price-to-earnings ratio of 10 times, compared with 17 times for the broader market.
At the start, 40 contracts for March, April, June and September have been listed.
Options will allow investors to hedge their investments but may also expose speculators to heavy losses. The premium is the price of option contracts, or the money that investors pay to own option rights.
In mid-morning trade, the premium of the call options of the lowest exercise price in March 2015, the most active contract early Monday, was quoted at 0.174 yuan, lower than the exchange's pro forma base premium of 0.1812 yuan.
The premium for the corresponding put options rose to 0.0823 yuan from the exchange base of 0.0788 yuan.
Other contracts generally showed similar trends, while the underlining assets, the China SSE50 ETF, rose 0.4 per cent around mid-morning, to 2.3 yuan. "The movements show investors tend to believe that China's blue chips are more likely to rise than fall in the short and medium term," said Zheng Weigang, head of the investment at Shanghai Securities. "Still, we are not very much sure about how reasonable these premiums are because it is the first time that equity options are traded in China," he said. "It will take some time to find right pricing for the options." Implied volatilities of the options, a key indicator on how investors measure risk for movements of underlining assets, were not immediately available.
Initial trading was relatively active, typical for the first day of a new product in China, traders said.
However, analysts have forecast the product will have a slow start due to regulatory restrictions to curb risk, although they believe the gradual rollout of new types of hedging tools will benefit Chinese equity markets in the long run.