The importance of time and volatility in the pricing and trading of Hang Seng Index (HSI) Options is the focus of a new educational article by Professor Stephen Cheung, Chair of Finance at the City University of Hong Kong, and Dr Kevin Cheng, Vice President, Education and Training in Hong Kong Exchanges and Clearing Limited's (HKEx) Exchange Business Unit.

The article notes the value of HSI Options depends on five main factors: current HSI level; strike price; time value (remaining life) of the option; volatility; and risk-free rate of interest. In addition, it explains why investors should consider the HSI's direction, and then concentrate on the time value of the option and the movement of the HSI's volatility.

The article also provides a brief introduction to the two basic measures of volatility, historical and implied volatility; it highlights some of the differences between short and long maturity options; and the appendix has the contract specifications for HSI Options.

In their conclusion, the authors discuss some of the resources HKEx provides for investors interested in learning the basics of options. They also state that by learning to understand the effect of time decay on an option position and mastering the basic concept of implied volatility, investors gain a decisive edge for trading HSI Options. They add in their conclusion that investors armed with these fundamentals will find trading HSI Options interesting and potentially rewarding.

"Managing Time and Volatility is the Key to HSI Options Trading Success" is the latest in a series of educational articles aimed at enhancing public understanding of the cash and derivatives markets and the important role they play in Hong Kong.

The article is available on the HKEx website -www.hkex.com.hk- in the Educational Articles section, under Investor Education. Past educational articles are also available on the website.