Listed options have been around for a long time and they are a popular product to trade due to their flexibility and the availability of the use of leverage. However, trading is not the same around the world, and traders in Hong Kong need to be aware of the unique rules and regulations that apply to local options trading. In addition, there are a few specific things to keep in mind when trading listed options in the city, of which this article will offer an overview.
The types of listed options available in Hong Kong
The types of listed options available in Hong Kong are:
Call options- These give the holder the right, but not the obligation, to buy the underlying asset at a specified price on or before a specific date.
Put options- These give the holder the right, but not the obligation, to sell the underlying asset at a specified price on or before a specific date.
The Hong Kong Exchanges and Clearing Limited (HKEx) is the only exchange in Hong Kong that offers to trade listed options. HKEx’s website has a dedicated section for listed options information, including an options trading manual, product specifications, contract sizes, and tick sizes. Options traded on HKEx have standard maturities of one month, three months and six months.
How to trade listed options
To trade listed options in Hong Kong, traders must have an account with a broker member of the Hong Kong Stock Exchange (HKEx). In addition, traders must be approved by HKEx to trade options. The approval process involves an assessment of the trader’s financial resources and knowledge of options trading.
Trading hours for listed options in Hong Kong are from 9:00 a.m. to 12:00 noon Monday through Friday local time, except for specific holidays.
The minimum contract size for listed options in Hong Kong is 1,000 underlying shares. The tick size, or the minimum price increment, is HK$0.01 per share.
Pricing of listed options in Hong Kong
Listed options in Hong Kong are priced in Hong Kong dollars (HKD). The exercise price of a call option is the price at which the holder can buy the underlying asset, while the exercise price of a put option is the price at which the holder can sell the underlying asset.
The premium is the price of the option contract and is paid by the trader to the broker when the trade is executed. The premium is quoted in HKD per share and is paid upfront. The expiration date is the last day the option contract can be exercised. As mentioned, in Hong Kong, listed options have standard maturities of one month, three months, and six months.
Exercising an option
If a trader holds a call option, they have the right but not the obligation to buy the underlying asset at the specified price on or before the expiration date. If a trader holds a put option, they have the right but not the obligation to sell the underlying asset at the specified price on or before the expiration date.
Suppose the underlying asset’s market price is above the exercise price of a call option at expiration or below the exercise price of a put option at expiration. In that case, the option will expire worthlessly, and the trader will lose their entire premium.
However, suppose the market price of the underlying asset is at or below the exercise price of a call option at expiration or at or above the exercise price of a put option at expiration. In that case, the option will be in the money, and the trader will make a profit.
The profit or loss from exercising an option is equal to the difference between the underlying asset’s market price and the option’s exercise price, multiplied by the number of shares specified in the contract.
What to consider before trading listed options
There are a few things to keep in mind before trading listed options in Hong Kong:
Options are derivatives products, and their prices are derived from the underlying asset price. As such, options are subject to the same risks as the underlying asset, including market, liquidity, political and economic risks.
Options are a leveraged product, which means that a slight movement in the price of the underlying asset can result in a significant move in the price of the option. It can work against the trader as well as for the trader.
Because options are derivative products, they are more complex than other securities such as stocks and bonds. As such, traders must understand how options work before trading them.
Options are speculative products, and their prices can be volatile. As such, options trading is not suitable for everyone, and traders should only trade with money they can afford to lose. Check out Saxo for more info on trading listed options.