options trading is a form of derivatives trading, more commonly known as futures trading, where traders take on obligation for future delivery (hence why it’s called “derivatives”) at an agreed-upon price and date of the asset they are holding at the expiration of the option contract.
This is usually used by people who wish to gain exposure to an underlying asset without physically owning that asset. It can be done through buying calls or puts on what the trader wants exposure to, whether it would be stock indexes, commodities, currencies, etc., through exchanges like HKEx, CME, CBOT, etc. They are similar to wagering with someone on a dice game, and both parties have to put their money where their mouth is.
Options are usually used by traders who already hold an asset but would like additional protection on the downside of the price movement for that underlying asset or want to gain exposure without physically owning it. Traders will use options trading when they think prices will move in one direction over time, ranging from a few days to a few months/years.
There are many types of options, but there are mainly two types of options used in Hong Kong – cash-settled and physically settled.
Cash-settled options allow a trader to gain exposure to price movement on underlying without taking physical delivery. This is usually done when traders don’t want or can’t take delivery because the asset they are holding is too small for them to handle the logistics, or the size of their position will cause a severe impact if they have an adverse move against them. Cash-settled options are usually derivatives on stock indexes like HSI, Hang Seng China Enterprises Index (HSCEI), FTSE, etc. A more popularly traded cash-settled product is a futures contract on the HSI index sold in Hong Kong.
Physically settled options give the trader the right but not the obligation to take physical delivery of the underlying asset, more commonly known as a futures contract on an underlying asset. This is usually done when a trader wants to gain exposure to movements in the underlying asset’s price and wishes to control the exact amount of that underlying asset. This is usually done by traders who base their decisions solely on the underlying price movement and nothing else – more commonly known as “pure contrarian” or “pure speculator”. For example, if you are long/bullish on copper / USD/CNH, you would buy a call option with a strike at 130,000 USD/CNH expiring 27 Aug 2017. If copper goes up, your profit would be unlimited. However, if it falls, you would have to buy actual copper on 27 Aug 2017 at 130,000 USD/CNH.
Hong Kong is one of the most popular places for options trading because of the following reasons:
1) Good liquidity
2) Easy access to global markets
3) Light tax regime
4) Clear rules and laws
There are pros and cons when trading in Hong Kong, but worth looking into for beginners who want to get their feet wet before diving into more complex derivatives like futures contracts. For beginning investors who want exposure or hedging against movements and price movement of an asset without physically owning it, options are worth looking into. Many experienced traders don’t even bother with futures contracts anymore because there is no benefit to taxation and convenience. Beginner traders should use a professional and reputable online broker from Saxo Bank and trade on a demo account before investing real money; for more information, get it here and start your investment journey today.