In recent years, the derivatives market in Hong Kong has multiplied. The trading of options is one of the leading products driving this growth. However, there is still some confusion about whether options are considered securities or futures in Hong Kong.
To understand this issue, you first need to understand the difference between securities and futures. A security is an investment product representing a claim on an underlying asset. For example, shares of stock are a type of security. On the other hand, futures are contracts to buy or sell an underlying asset at a future date for a predetermined price.
An option is a contract that permits the holder to buy or sell an underlying asset at a predetermined price on or before a specific date. Because options give the holder the right to buy or sell an underlying asset, they are sometimes considered securities. However, because options are contracts, they are also sometimes considered futures.
Listed options are securities or futures in Hong Kong, depending on how traders trade them. If options are traded on the Stock Exchange of Hong Kong (SEHK), then they are considered securities. If options are traded on the Hong Kong Futures Exchange (HKFE), they are considered futures.
Who determines whether options are securities or futures?
The Securities and Futures Commission (SFC) is the primary regulator of the securities and futures markets in Hong Kong. The SFC has published guidance on the classification of options but has not provided a definitive answer to whether options are securities or futures.
The SFC notes that options may be classified as securities or futures depending on the terms and conditions. The SFC also notes that traders can trade on the SEHK or HKFE and that their classification will depend on the exchange traders choose to trade them.
How to trade options
Open an account
You will need to open a securities account with a licensed broker to trade options as securities on the SEHK. In contrast, you will need to open an account with a licensed Futures Commission Merchant (FCM) to trade futures options on the HKFE.
Choose an option
You can trade two types of options: call options and put options.
Call options permit the holder the right to buy the underlying asset at a predetermined price on or before a specific date.
Put options permit the holder the right to sell the underlying asset at a predetermined price on or before a specific date.
Determine the amount you want to trade
The amount you want to trade will determine whether you need to apply for a trading permit. If you want to trade more than 500 contracts, you must apply for a trading permit.
Choose a broker
Your broker or FCM will execute your trades on the SEHK or HKFE. You can appoint a broker based on their commission rates, platform fees, and other factors.
Place your order
Once you have chosen a broker or FCM, you will need to place your order with them. Your broker or FCM will then execute the trade.
The benefits of trading options
You can use options to hedge against risks
You can use options to hedge against risk by providing the holder with the right, but not the obligation, to buy or sell an underlying asset. Holders of options can protect themselves from losses if the underlying asset’s price falls.
You can use options to wager price movements
You can also use options to speculate on price movements. Because options give the holder the right, but not the obligation, to buy or sell an underlying asset, they provide a way for traders to profit from both rising and falling markets.
Options are versatile
Options are a versatile tool that you can use in various ways. For example, you can use them to hedge risk, speculate on price movements, or generate income.
Options are liquid
Options are liquid assets which can be easily bought and sold because there is a large and active market for options.
Options are transparent
Options are transparent because the market determines the price of options, meaning traders can easily see the prices at which options are trading.