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In Shanghai, investors have a different 'option'
Last Updated: 2015-02-10 07:52 | China Daily
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A technician repairs the electronic display at a brokerage in Fuyang, Anhui province, on Feb 9, 2014. On the first trading day of stock options, shares of securities firms rose 4.13 percent and led the gain of the Shanghai Composite Index. [Photo provided to China Daily]

Derivatives based on exchange-traded fund are seen as reducing volatility in market

Trading of stock options made its long-awaited debut on the Shanghai Stock Exchange on Monday, allowing investors more ways to hedge risks and make profits.

Volume was light, with just 25,113 contracts valued at only 37.86 million yuan ($6.06 million) changing hands. But the introduction of stock options was viewed as a milestone for the nation's capital market, which has long been known for being underdeveloped and volatile.

The launch of options trading also underscored the securities regulator's intent to attract large and sophisticated institutional investors into the market, which is now dominated by small retail investors.

"A capital market without stock options is like an economy without insurance," Huang Hongyuan, general manager of the Shanghai Stock Exchange, said just before trading kicked off.

Options trading "will help improve the capital structure of the market and meet the demand for value investment by long-term institutional investors such as the country's social security fund and the pension fund", he said.

Options give buyers the right to buy or sell the underlying instrument at an agreed price on a specific date. The options are the first equity derivative China introduced since it launched the trading of stock index futures in 2010.

At present, options trading is limited to the Shanghai Stock Exchange 50 ETF, an exchange-traded fund tracking the country's 50 most heavily weighted stocks.

The most actively traded contracts on Monday were March call options at 2.2 yuan, accounting for one-fourth of total trading volume, as investors bet on further gains for blue-chip stocks in the short term. Call options give holders the right to purchase the underlying asset, while puts allow them to sell.

Ee Chuan Ng, head of Bloomberg China, said the introduction of stock options represented a significant development in China's capital markets and a move toward greater financial reform and market liberalization.

"For this new hedging tool to positively contribute to a more robust equity market, liquidity will be an imperative factor," he said.

Analysts said the short-term effect of options trading is usually an immediate boost in the prices of target stocks or indexes. But in the long run, the trading tool will help curtail market volatility.

Liao Hong, chief economist at investment bank China International Capital Corp Ltd, said that options trading will improve liquidity and investors' confidence in the stock market.

"It is just the beginning for China to develop and improve its derivative market. More complicated derivative tools can be expected as the country will accelerate its financial innovation in the next five to 10 years," Liang wrote in a research note.

Some analysts anticipate that the regulator may soon expand options trading to the stock index and individual stocks.

Securities firms are believed to be among the first to benefit from the launch of the option trading as it will boost their revenue. Shares of securities firms moved up 4.13 percent and led the gain of the Shanghai Composite Index.

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