Iron ore is the “star product” of the futures market. Its large price fluctuation in 2019 has brought huge price risks to steel mills. Iron ore options, the first industrial options product of Dalian Commodity Exchange (DCE), was listed on December 9, providing industrial enterprises with a new risk-avoiding instrument. It is learnt that the iron ore options has presented rational and stable operation, active participation from corporate clients and steady increase in trading volume and open interest in the first month. The listing and operation of the iron ore options represent the final stage of the “1 Completeness, 2 Connects” pattern, and a relatively optimized system with derivatives instruments, products and market service has been set up to better serve the high-quality development of the iron and steel industry.
Stable operation and broad market participation in the 1st month
According to statistics, till January 9, 2020, the iron ore options has been in operation for 23 trading days since its listing, with an accumulated trading volume of 505,000 contracts, a trading turnover of RMB 1.18 billion and an average daily open interest of 77,000 contracts. In particular, the trading volume of call options and put options was 269,000 contracts and 236,000 contracts respectively and the options trading volume accounted for 2.5% of the underlying futures. And the average daily turnover rate was 0.38, staying at a reasonable level.
Among the 11 listed iron ore options series contracts, the 2005 series is the most active, with a trading volume of 405,000 contracts and taking up 80.3% of the total. The 2002 and 2009 series are after it, taking up 12.9% and 5.5% respectively.
Besides, the open interest of iron ore options has presented a generally stable increase. The open interest was 99,000 contracts on January 9, up by 582% compared with that on the listing day.
The iron ore options has presented good liquidity in the first month since its listing, which cannot be separated from DCE’s accumulated experience, system optimization and market cultivation in soybean and corn options. The contract and system design of iron ore options have drawn experience from those of listed options. Existing options clients can directly obtain the iron ore options trading access and relevant parties are more familiar with trading rules. In addition, the soybean meal options adopted strict position limit of 300 contracts when it was listed and, along with the stable operation of the options market, DCE has successively raised the position limit to 40,000 contracts to meet the trading demand. The position limit of iron ore options starts from 400,000 contracts, the same with soybean meal and corn options, and the appropriately relaxed position limit will assist the functioning of options.
Stable volatility, effective functioning of market makers
The implied volatility of 2005 contract series is between 22.6% and 26.4%, remaining stable on the whole. The implied volatility of I2005-C-650 has dropped from 25% on the listing day to 20% while that of I2005-P-650 (a series with the largest open interest of put options) has gone up, remaining between 28% and 30%.
12 market makers have performed the duties of continuous quoting and quote responding since the listing of iron ore options, which has helped to form a rational market price.
Risk-avoiding function initially shown, enterprises taking part through multi-strategy
Industrial enterprises and investment institutions have actively taken part in the options market with diversified risk-avoiding strategies and trading modes since the listing of iron ore options. And the trading volume and open interest of corporate clients accounted for 74% and 72% respectively in the first month.
Relevant officials believe that as the iron ore options market gets increasingly mature, enterprises can adopt more flexible and diversified hedging strategies to achieve sound and stable operation.
Consolidating the basis for “1 Completeness, 2 Connects”, iron ore options showing broad prospects
Upon the stable operation of iron ore options, the iron ore has first realized the new pattern of “1 Completeness, 2 Connects” (a product complete with futures, options and swaps and connecting the spot and futures markets as well as the domestic and overseas markets). An official says that as iron ore has huge import amount, strong industrial basis and frequent price fluctuations, the iron ore options will have broad development space as the last puzzle of the new patter of “1 Completeness, 2 Connects”.