HKEx Announces Plans for Synthetic Futures Trading in its Stock Options Market

Hong Kong Exchanges and Clearing Limited (HKEx) announced today (Friday) that it plans to introduce a standard combination trading function in its stock options market on 9 May this year, pending regulatory approval, to allow investors to use synthetic futures strategies in the trading of five active stock option classes: China Construction Bank, China Life Insurance, China Mobile, HKEx and HSBC.    

A standard combination trading function has been operating smoothly in HKEx’s stock index futures and stock index options markets for several years.     

A synthetic futures strategy is a stock option combination which consists of two option legs.  The buyer of synthetic futures buys a call option and sells a put option with the same underlying stock, strike price and expiry date, whereas the seller of synthetic futures sells a call option and buys a put option with the same features.  The standard combination trading function allows investors to price synthetic futures as a package, which can reduce execution risk.  

The advantages of using synthetic futures are:

1. They can be used by investors to manage delta exposure in stock options portfolios.  Economically, their payoff at expiration will be similar to that of equity holdings.
   
   
2. As they operate on a net premium basis, they can help investors reduce their initial capital outlay.
   
   
3. Options positions resulting from synthetic futures trading at HKEx will be able to be margined with other stock options portfolios on a net basis in the clearing system so they will be able to help investors reduce the margin required in a hedged options portfolio.

The standard combination order function may be extended to other stock option classes, subject to market demand.

“We believe synthetic futures are an effective way for investors to manage delta exposure in stock options portfolios and they may help investors in reducing capital outlays in options-related trading activities,” said Calvin Tai, HKEx’s Head of Trading.   “This will be something new for our stock options market so we would like to remind investors that they should be fully aware of the features and risk exposures when using synthetic futures.”

Please refer to the circular issued to Exchange Participants for key market arrangements for the planned synthetic futures series and price quotation details.

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