The Shanghai Stock Exchange (SSE) will launch option trading on individual stocks later this year as part of its bid to offer more options to institutional investors, Gui Minjie, chairman of the exchange, said Wednesday.
Ahead of the eventual launch, the SSE is currently planning the expansion of a pilot program that simulates option trading while exchange officials work on finalizing regulations to support the transaction of such derivatives, according to Gui.
The SSE rolled out a program in June which allowed for virtual trading of shares of Industrial and Commercial Bank of China and units of Huaxia Capital Management's China 50 exchange-traded fund, which tracks the market's top stocks.
To control risk in the early stages, trading will be confined to institutional investors buying and selling options for blue-chip stocks, Gui elaborated, without offering details regarding individual investors.
According to reports in the Securities Times, which cited insiders close to the SSE, individual investors looking to conduct option deals may need to have at least 1 million yuan ($160,823) in their premium accounts once option trading opens to them, well above the 500,000 yuan minimum required for trading equity index futures.
Chinese securities authorities and regulators have been stepping up the availability of equity derivatives in recent years amid broader efforts to promote the development of the capital market. For instance, China officially launched stock index futures trading in 2010.
"The market has reacted actively toward these new products, and we will carry on providing more this year," Gui said.
Equity derivatives, many of which enable investors to profit even when stock prices drop, are also expected to help strengthen pricing controls within the market, Li Daxiao, director of research at Yingda Securities, told the Global Times.
"We also expect to see more products following blue-chips, which will encourage investors to put their money in stronger stocks rather than to speculate on junk shares," Li said.
An option is a contract that offers the buyer the right to buy or sell a specific asset, such as physical commodities or financial securities, at a pre-determined price on or before a specified date.
The buyer of the option can choose to exercise or relinquish this right, for which he or she has paid a premium to the seller. The seller is legally obligated to follow through with the contract if the buyer exercises their option.
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