The Shanghai Stock Exchange (SSE) embraces another historical moment on February 9. The launch of the SSE 50 ETF option contract, the first stock option product, marks the entry of China’s capital market into the era of option. This means that the SSE has become the first comprehensive exchange in China with a product line ranging from the spot market to the derivatives market, and also that China’s capital market has gained in-depth development and become more complete. All this will further promote Shanghai’s status as an international financial center and enhance its global influence.
A simple yet solemn ceremony is held by the SSE for the launch of stock option. Han Zheng, Member of the CPC Central Committee Political Bureau and Chief of the CPC Shanghai Municipal Committee, and Xiao Gang, Party Chief and Chairman of the China Securities Regulatory Committee (CSRC), jointly strike the gong for the first trading day of the SSE 50 ETF option contract. Yang Xiong, Mayor of Shanghai, and Gui Minjie, SSE Chairman of the Governors, unveil the product. Yao Gang, Vice Chairman of the CSRC, and Huang Hongyuan, SSE President, deliver speeches.
First developed in the U.S. in the early 1970s, stock option is now the fundamental and mature risk management instrument on the global capital market. It accounted for about 50% of the derivatives trading volume on major exchanges around the world in 2013. The development of stock option business has great significance in further improving the price signal function of the capital market, diversifying risk management instruments, increasing the capital market’s pricing efficiency, encouraging value investing and building China’s blue chip market.
As a brand new product in China’s capital market, the SSE 50 ETF option has won great popularity among investors. The trading is generally stable in the whole day, which meets the market expectation.
According to the SSE’s data, a total of 40 SSE 50 ETF option contracts are traded on February 9, including call option and put option, with 4 contract months (March, April, June and September) and 5 exercise prices.
The first trading day of SSE 50 ETF option sees stable operation, with the volume of 18,843 contracts among which 11,320 are call option contracts and 7,523 put option contracts; the turnover of premium reaches RMB28.7 million and the nominal value traded is RMB431.8 million; the open interest totals 11,720 contracts. The trading results well satisfy the market expectation.
In general, the market participants are rational. A total of 542 accounts participate in the trading, including 492 individual investors and 50 institutional investors. The volume/position ratio is 1.61 before hedging, and 2.17 after hedging, much lower than 10, the volume/position ratios of the U.S. option market and the China Financial Futures Exchange’s stock index futures market.
The pricing of the SSE 50 ETF option on its first trading day is reasonable. The deviation level of 1.47% between the trading price and the theoretical price calculated according to the option pricing formula most frequently used in the international derivatives market is far lower than 10%, the deviation level of the mature markets. There is no price inversion on the first trading day, as the prices of the in-the-money contracts are higher than those of the out-of-the-money contracts, and the prices of the deferred month contracts are also higher than those of the near month contracts. In addition, the put/call ratio of 0.66 representing investors’ expectation on underlying securities market (lower than 1 means positive expectation on the market), is consistent with the rally of the SSE 50 ETF on that day. Generally speaking, the correlation between futures and spot is in an ideal condition.
According to the performance on the first day, the SSE 50 ETF option plays a positive role in enhancing the spot market’s confidence. It had been expected that the market index would experience certain adjustment this Monday, as bearish news kept emerging last weekend, including that securities dealers were prohibited to sell umbrella trust, and that regulatory departments reiterated the access threshold for margin trading and securities lending. However, the SSE Composite Index closes with a rise of 0.62%, and the SSE 50 Index an increase of 1.79% (much more than that of the SSE Composite Index), which means the general recognition of the SSE 50 ETF option. It also means that the launch of stock option, similar to that in mature markets, has a positive contribution to the increase of the securities market’s liquidity and investors’ confidence.
Yao Gang: 3 benefits from stock option
Yao Gang says in his speech that the launch of the SSE 50 ETF option marks a breakthrough of the SSE’s innovative development and a new progress in the construction of the multi-tier capital market; it also injects new energy for turning Shanghai into a global financial center. The pilot of the stock ETF option trading on the stock exchange is an important measure to carry out the requirements in the “Some Opinions of the State Council on Further Propelling Sound Growth of the Capital Market”, which could diversify investors’ trading strategies and risk management measures, improve the price discovery mechanism of the capital market, as well as enhance the stock exchange’s leading position and promote innovative development of securities and futures dealers.
Yao adds that stock option is a risk management instrument, yet it could lead to new risks. To take advantage of its unique functions requires efforts of all market participants. We should do a better job in investor education, service provision, risk management and control, and market regulation.
Yao says that stock ETF option is the first derivatives product across the futures and spot markets settled with the delivery of the stock ETF at the settlement day, therefore posing new challenges for our traditional regulatory mode featuring separate monitoring and supervision over the futures and spot markets. The CSRC will enhance regulation over each link on the stock ETF option market, and crack down on illegal deeds such as market manipulation and insider trading, so as to protect the legitimate rights and interests of investors. Besides, we will timely sum up experience to improve the systems and rules, with an aim to promote the healthy development of the market.
Huang Hongyuan: 4 expectations for stock option
Huang Hongyuan says in his speech that stock option is a mature derivative in the global market as well as a fundamental risk management instrument. Like the function of insurance in real economy, stock option could also transfer risks. Stock option will become a pioneering product to open up the future development of the market.
Huang expects that the stock option could boost market innovation in the future, as it could provide investors with diversified choices, support product innovation and diversify trading strategies. He also expects that the stock option could increase the market efficiency by fully reflecting market expectations, increasing market pricing efficiency, and promoting capital generation. Among his other expectations, the stock option could serve as a tool to improve investor structure by helping investors get rid of the constrains of linear profit and loss, and meeting the “principal safety and value investing” demand of insurance capital, social security funds, pension funds and other long-term funds for improvement of the market’s capital structure. Furthermore, he expects that the stock option could impel the future development of the SSE and the industry. The SSE will build itself into the first exchange providing both spot and futures in China, better bring off its functions of securities pricing, risk management and asset allocation as a liquidity center, enhance the depth and attractiveness of its blue-chip market, and contribute to the construction of Shanghai International Financial Center.
Huang also says that the stock option is a complex risk management instrument which remains to be new in China and unfamiliar to investors, who still need time to study and learn. Therefore, at the preliminary stage after the launch of the stock option, the SSE has set up a high threshold for investors and taken strict risk control measures. The SSE won’t expect brisk trading during the initial period after the launch or an immediate demonstration of its functions. Instead, the SSE prefers to have a long-term perspective to ensure its smooth start and stable operation. We believe that with the accumulation of investors’ experience and their improved level in practice, the functions of stock option will definitely be manifested. We hope that investors, industry institutions and the media can fully understand our prudent considerations in the process of promoting innovation.
Witnessed by honorable guests, Han Zheng and Xiao Gang jointly strike the gong to declare the official launch of the SSE 50 ETF option contract.
Among those invited to witness this historical moment are honorable guests from relevant ministries and commissions of the State and their agencies in Shanghai, Shanghai Municipal Party Committee and Shanghai Municipal People’s Government, the securities and futures regulatory systems, financial institutions in Shanghai, market institutions and news media.