Stock Options

Introduction

Stock options are one of highly flexible financial derivative instruments, which can be used in different market conditions for the purposes of investment or managing risk with leverage. Stock options enable clients to profit from both downside and upside. CITIC Securities Wealth Management (HK) offers clear, intuitive online stock options trading platforms with competitive per contract based price with no hidden costs.
 
Features
• Stock options can be hedged with underlying stocks to protect the value of the portfolio, reduce buying cost and lock the profit, and lower market risk effectively.
• Stock options can be used as a single investment instrument, a combination of option products, and other investment instruments, allowing investors to profit from different market conditions (including the bull market, bear market, the narrow and large fluctuations).
• The leverage allows investors to buy and sell at lower costs, and the potential return rate is also larger than that of the underlying stocks.
• Transaction costs are lower than buying and selling underlying stocks, and paying stamp duty is not required.
 
Why trade stock options with CITIC Securities Wealth Management (HK)?
 
Excellence Trading Platform
The trading system is fast and simple, providing professional quantitative data, latest market information, real-time profit and loss, trading records etc., which is an unparalleled combination of advanced technology and powerful trading tool that helps clients to achieve their investment goals. 
 
Safe and Reliable
CITIC Securities Wealth Management (HK) is a regulated financial institution. In addition, our system is secure and robust. Benefit from the highest standards of data protection in the industry, clients can access trading platform through two-factor authentication to verify their identities.  
 
Types
Stock options are exchange-traded financial contracts agreed by both buyers and sellers. The contract gives clients the right to buy or sell designated stocks which are settled by clearing house at an agreed price before or when the contract expires. Stock options can be divided into the following four categories:
 

 

Expect stock price to go up

Expect stock price to go down

Long (Buy)

LONG CALL

Buyer pays a premium for the right to buy the underlying stocks at strike price.

LONG PUT

Buyer pays a premium for the right to sell the underlying stocks at strike price. 

Short (Sell)

SHORT PUT

Seller receives a premium from the buyer, and has the obligation to buy the underlying stocks from the buyer at strike price.

SHORT CALL

Seller receives a premium from the buyer, and has the obligation to sell the underlying stocks to the buyer at strike price.
 
Option Premium
Option premium is the price of the option. Seller receives option premium from the buyer. 
Option premium= Intrinsic Value + Time Value
Intrinsic Value is the difference between the strike price/level of an option and the market price/level of the underlying stocks.
 

 

Call Options

Put Options

Market Price < Strike Price

Intrinsic Value=0

out-of-the-money (OTM)

Intrinsic Value>0

in-the-money (ITM)

Market Price = Strike Price

Intrinsic Value=0

at-the-money (ATM)

Intrinsic Value=0

at-the-money (ATM)

Market Price > Strike Price

Intrinsic Value>0

in-the-money (ITM)

Intrinsic Value=0

out-of-the-money (OTM)
 
The value of option premium will be affected by various factors such as Underlying Price, Strike Price and Time to Expiry, etc.
 
Option Strategies

 

Short Put

Investor can receive premium and make profit if the price of underlying stocks increases; If the option is being exercised, investor may buy the stock at a lower price. 

Long Put

The profit from option can hedge the underlying stocks against downside.

Long Straddle

Long Straddle has substantial profit on the downside and unlimited profit on the upside.

Short Straddle

Make profit when the stock price is between the two break-even points and receive premium.
 
For more information about option strategies, please visit HKEX website. 
 
Settlement
☑ At HKEX, the settlement style of stock option is physical; Options can be exercised at any time before 4:00 p.m. on any business day and including the last trading day.
 
☑ Option buyer has the right to buy/sell the underlying stocks at the strike price and Option seller has the obligation to buy/sell the underlying stocks at the strike price upon exercise on or before the expiry day.
 
☑ The settlement date of HK stock options that settled with cash is on T+1, the exercise or assignment of HK stock options is settled on T+2. Clients must deposit sufficient funds or deliver sufficient underlying stocks on time.
 
☑ For any exercises or assignments before EX-Dividend Date, the right of dividend belongs to option buyer.
 
☑ The Dial-in commission and other related fees (such as stamp duty, exchange levy, SFC transaction levy, settlement fee etc.) will be charged when the exercise or assignment of HK stock options involves stock transaction. 
 
☑ Buyer can exercise the options at any time on or before the expiry date of the contract. Seller may be assigned at any time on or before the expiry date of the contract.HK stock options are not always automatically exercised. Only open options contracts that are 1.5% or more in-the-money upon expiration will be automatically exercised.
 
☑ If clients have underlying stocks holding, clients can contact us to place a covered call instruction to transfer their underlying stocks from securities account to stock options account and the paid initial margin will be refunded.
 
Initial Margin Requirements
Please access HKEX website for margin data, CITIC Securities Wealth Management (HK) will adjust the relevant deposit requirements in a timely manner according to market conditions. If the net-worth in the trading account falls below a maintenance margin level, clients will receive a margin call of requesting additional funds or closing position, CITIC Securities Wealth Management (HK) reserves the right to apply forced liquidation.
 
Risks
☑ The liquidity of stock option market may be low sometimes. It may not always be possible to liquidate an existing position, so that the loss might be enlarged. 
 
☑ Sellers need to manage risk in advance. With the use of leveraged margin tools the potential loss can be unlimited while underlying price can go up without boundary theoretically.
 
☑ All short option positions may subject to sudden increases in margin requirements.
 
☑ Stock options are not always automatically exercised on expiry as the option buyer has the right to exercise before expiry date.
 
☑ Stock options are a high risk financial instrument. Clients who intend to buy or sell stock options should understand the types of options they intend to buy or sell (i.e. put options or call options) and the associated risks.
 
The List of Stock Options Classes Available for Trading
Hong Kong stock options market has almost 100 different stock options products for investors to choose. Please note that not every option contract is equal to one lot of stocks, and stock options can be divided into three categories according to the level. For details, please browse HKEX website. 
 

 

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