Chinese Stock Options Trading

Chinese Stock Options Trading
By www.Options-Trading-Education.com

http://www.options-trading-education.com/24183/chinese-stock-options-trading/
Options trading has arrived in China.
The Economic Times reports
that stock options trading has
begun in the Shanghai stock
exchange.

China launched stock options trading
for the first time on Monday, aiming
to develop broader capital markets
and give investors a tool to manage
risk.

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An option gives the holder the right
to buy or sell an underlying asset, but
-unlike futures – with the choice of
whether or not to exercise the
contract.

The Shanghai Stock Exchange held a
ceremony for the launch of the
options on an exchange-traded fund,
the China 50 ETF.

It tracks 50 of its largest listed firms,
including banking giant ICBC and
carmaker SAIC Motor.

State media have said options could
cause greater market volatility, but
in the long run may help investors
hedge against risk and discover value
investing.

This is a sign of a maturing stock
market.

It is also a matter of concern in a
market that is prone to excessive
optimism.

Chinese stock market trading will
indeed allow investors to contain risk

But, as options traders know, risk is
contained by purchasing options and
risk can be multiplied by selling
uncovered options.

A Hefty Margin
Requirement

The Shanghai exchange will require
options traders to hold the equivalent
of $80,000 in their accounts in order
to engage in Chinese stock options
trading.

Buyers of options contracts need only
pay the required premium but sellers
of options will need to have collateral
in their accounts to cover potential
losses.

A Learning Curve

Chinese stock options trading is a
completely new thing for those
trading the Shanghai market.

The Chinese English language
network, CNTV, gives viewers a little
background on the development of
options trading.

Options trading is a new tool in the
Chinese mainland’s markets.

But options have long been a mature
and popular way of investing in
many parts of the world.

The history of stock options can be
tracked back to as early as the 18th
century.

However, the first organized,
standardized and government-
supervised stock options market
appeared in 1973 in the United
States, which is now known as the
Chicago Board Options Exchange.

At the very beginning, only buying
and selling long were allowed.

But from 1977, investors could buy
and sell short on the CBOC.

The New York Stock Exchange also
launched stock option trading in
1982.

In Europe, the development of stock
options started from 1978.

In 1984, the London International
Financial Futures and Options
Exchange introduced the British
FTSE 100 Index option.

Options contracts in Europe grew
quickly.

From 1998 to 2008, the contract
quantity in the region saw an almost
ten-fold jump.

This is old news for traders in the
West but necessary instruction as
Chinese stock options trading attracts
trading capital.

Calls or Puts

With the current state of the Chinese
economy and Chinese stock market
should options traders in Shanghai be
buying calls or puts on stocks?

The Shanghai market has had a great
run up in the last six months.

Many believe it is overpriced
considering that the Chinese
economy is cooling off and a weak
global economy has reduced demand
for Chinese exports.

Likewise the Chinese real estate
bubble is in danger of bursting.

A sharp slump in China’s trade
performance last month is now
ringing alarm bells about the overall
health of the world’s second largest
economy.

Figures released Sunday showed that
Chinese exports fell in January by 3.3
percent from year-ago levels, while
imports dropped by 19.9 percent –
their sharpest fall since the global
financial crisis in 2009.

The news came against the backdrop
of slowing GDP growth in China,
which came in at 7.4 percent in 2014,
the lowest expansion in 24 years.

This composite being the case smart
traders will be more likely to purchase
puts which will give them the right to
sell stocks at a set price even if the
market collapses.

In addition anyone selling options
contracts in Chinese stock options
trading will need to follow the market
closely to avoid huge losses if and
when the market tanks.

Chinese Stock Options Trading

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