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1. |
What are HSI options? |
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These are stock index options contracts based on the Hang Seng Index.
A stock index option gives the holder the right, but not the obligation, to buy or sell a specific stock index at a fixed price on a given date (European-style) or on-or-before a given date (American-style). Option buyers pay a premium for this right.Option sellers receive the premium but have an obligation to buy or sell a specific stock index on assignment if the buyer exercises his right.
There are two types of stock index options. A Call option is the right to buy a specific stock index at a fixed price on or on-or-before a given date. A Put option is the right to sell a specific stock index at a fixed price on or on-or-before a given date.
The following is an example of an HSI option:HSI FEB 15,000 Call Option This means a Call option on the HSI which expires in February (FEB) and has a Strike Price (or exercise price) of 15,000 index points.
The holder of this Call option would have the right to exercise the option on the Expiry Day in February. Exercise of the option would only take place (i.e. the holder making a profit) if the Official Settlement Price is higher than the Strike Price of 15,000. By exercising the Call option, the holder effectively buys the index at 15,000 (the Strike) and sells at the Official Settlement Price. Since HSI options contracts are cash settled, the holder would receive the cash equivalent of the difference between the Strike Price and the official Settlement Price.
A Put option is very similar except that whereas a Call option gives the holder the right to buy the index at the Strike Price, a Put option gives the holder the right to sell the index at the Strike Price.
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2. |
What are the advantages of trading HSI futures and options Contracts? |
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- PROVEN MARKETS
Hang Seng Index futures and options allow experienced and novice
investors alike to participate in the performance of 33 constituent stocks
in the index. As both local and international investors regard the Hang
Seng Index as a tested benchmark for the Hong Kong equity market
and yardstick of portfolio performance, these contracts are consistently
used by investors for trading and risk management purposes.
- COST EFFECTIVE
Hang Seng Index futures and options enable hedging activities to be
carried out in a more cost-effective way as they are traded on a
margin basis. The margin to carry an open position is only a fraction
of the contract value.
- LOW TRANSACTION COSTS
As the total value of high-capitalization stocks represented in each
Hang Seng Index futures and option contract is substantial and
only one commission is charged to establish or liquidate a contract,
transaction costs are low when compared with purchasing or selling
the constituent stocks.
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3. |
What are the commonly used market terms that related to stock index futures and options trading? |
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- Discount - The amount by which the price of a stock index futures contract is quoted below the cash market price.
- Expiry Day - The business day immediately preceding the last business day of the contract month.
- Hedging - Transferring the risk of loss due to adverse price movement through the purchase or sale of contracts in the stock index futures market.
- Leverage - The essence of stock index futures trading. Controlling a large investment with a relatively small margin deposit.
- Premium - The amount by which the price of a stock index futures contract is quoted above the cash market price.
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HK Futures
