An option is a contract that gives the holder the right, but not the obligation, to buy or sell an underlying security at a specified price (the strike price) on or before a specific date (the expiration date).
Options are derivative instruments that give the holder the right to buy or sell an underlying asset at a specified price on or before a specific date. Options are traded on underlying assets, including stocks, commodities, currencies, and indexes.
In Hong Kong, options are traded on the Hong Kong Exchanges and Clearing Limited (HKEx), the city’s primary securities and derivatives exchange. HKEx offers two types of options: call options and put options.
- Call options give the holder the right to buy an underlying asset at a specified price on or before a specific date.
- Put options give the holder the right to sell an underlying asset at a specified price on or before a specific date.
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How do options work?
When you purchase an option, you pay for the right to buy or sell the underlying security at the strike price. The seller of the option receives that premium in exchange for giving up that right.
If you decide not to exercise your option, it expires worthless, and you lose the premium you paid. If you choose to exercise your option, then the holder of the other side of the contract must fulfil their end of the bargain by either buying or selling the underlying security at the strike price.
What are the listed options?
Listed options are options that have been listed on an exchange for trading. The critical difference between listed and unlisted options is that there is no secondary market for trading the option with unlisted options, so you will need to agree on a price with the counterparty before you can trade.
There is a secondary market with listed options, and you can buy or sell the option at the prevailing market price.
What are the advantages of trading listed options?
There are many benefits to trading listed options:
- You have greater flexibility as you can trade them online or over the phone.
- You can trade them as quickly as shares.
- You have access to a wide range of options with different strike prices and expiration dates.
- The liquidity is high so that you can get in and out of trades quickly and at low costs.
- You can use them for hedging or speculating purposes.
How do you trade listed options in Hong Kong?
The process of trading listed options in Hong Kong is as follows:
Choose the underlying security you want to trade options on. There are many different types of securities that you can trade options on, including stocks, indexes, currencies and commodities.
Decide whether you want to buy or sell an option. If you want to buy an option, you will need to decide whether you want a call option or a put option. A call option gives you the prerogative to buy the underlying security at the strike price, while a put option gives you the right to sell the underlying security at the strike price.
Choose the strike price and expiration date of the option. The strike price is when the underlying security can be bought or sold. The expiration date is when the option is terminated and can no longer be traded.
Place your order with your broker. You will need to provide them with the particulars of your trade, including the type of option, strike price, expiration date and many contracts.
Monitor your position and make adjustments as needed. Once your order is assigned, you will need to monitor your position and make necessary adjustments.
Before trading options, it is essential to understand the risks involved. Options involve a high degree of risk and are unsuitable for all investors. Trading listed options in Hong Kong is a relatively straightforward process and can be a great way to gain exposure to different securities.
For more information, link to options trading.