Options ABC

Chapter 7: Trading options at HKEX

Options contracts may be traded between parties over-the-counter (OTC) or in markets operated by an exchange (exchange-traded).

As its name implies, exchange trading happens in exchanges (i.e. stock exchange or futures exchange), While OTC trading is different. OTC trading happens when two parties directly trade financial instruments such as derivatives between themselves.

The question of whether the holder or writer can fulfill their obligations is called counterparty risks. For OTC options, it is subject to the credit-worthiness of the counterparty. For exchange-traded options, the counterparty risks are minimised since the options contracts are cleared by clearing houses.
Minimised counterparty risks

Hong Kong Exchanges and Clearing Limited (HKEX) offers option contracts on individual stocks and indices for trading. The counterparty risks between the buyers and sellers are minimised as all stock option contracts are cleared by The SEHK Options Clearing House (SEOCH) and index option contracts cleared by HKFE Clearing Corporation Limited (HKCC).

The stock option contracts are novated so that SEOCH becomes the buyer for every seller and the seller to every buyer. Similar relationship happens between index option contract buyers/sellers and the HKCC. SEOCH/HKCC ensures options contract performance between the SEOCH clearing participants/ HKCC clearing participants.

However, the counterparty risks between the brokers and their clients are not handled by SEOCH or HKCC.

Margin requirements

Margin deposits are required for all short option positions. The amount of margin deposit required depends on the intrinsic value (whether the option is in-the-money, at-the-money or out-of-the-money), expiry of the option and the volatility of the underlying stock/index.

Open short option positions are marked-to-market daily (i.e. daily adjustment of the account's gain or loss). In normal trading days, if the net-worth in your trading account falls below a maintenance margin level at market close, you will receive a margin call from your broker requesting additional funds for your account. In times of extreme price volatility, SEOCH or HKCC will perform additional intra-day mark-to-the market calculations on open positions and call for payment of margins.

No margin is required on long stock option positions. Assigned or exercised positions pending stock settlement are subject to margin requirement while short call positions which are covered by a corresponding amount of the underlying stock deposited with the SEOCH as collateral are not.

Please access Margin Data Search page under Trading Information section for gross margin data.