China’s Securities Regulatory Commission (CSRC) will introduce on February 9 the first exchange-listed option on the Shanghai Stock Exchange 50 Exchange-Traded-Fund (ETF), which is expected to help the development of the country’s listed derivatives and OTC markets.

The underlying of the option contract is Huaxia SSE 50 ETF, a fund tracking the performance of the Shanghai Stock Exchange  50 index - which consists of 50 blue-chip stocks.

Yang Lu, senior associate, equity derivatives at Citic Securities, said that the launch of the ETF options will boost the listed and over-the-counter (OTC) markets. “Currently there is only delta one trading in the listed market and the introduction of [the new] options will offer more choices of risk-return profiles for investors,” he said. “Also for retail investors with direct investments in the stockmarket, the launch of the listed options will allow them to hold a put position and hedging their risk at a much lower price.”

According to Lu, for OTC options providers such as Citic Securities it used to be difficult to set up option pricing without an accurate calculation of implied volatility.

“Once the new options are introduced, we will be able to know the exact delivery price of the listed options, from which we could extrapolate the implied volatility surface and make the pricing process easier,” Lu said.

SSE 50 ETF options will follow the T+0 settlement rule as opposed to physical stock transactions which fall under T+1 settlement. The rule is intended to prohibit investors from holding both long and short positions on  the same day and will lessen the frequency of hedging.

Ti Liu, head of derivatives and manager of the financial innovation lab at SSE, said that ETF options will be part of the first breed of option products in the country ahead of index options because of their “high liquidity, stronger correlation with the underlying markets that they track, as well as price stability compared with stock index options or single stock options”.

Liu expects index options to be introduced this year.

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