Futures exchange to launch index option on TAIEX

The Taiwan Futures Exchange will launch an index option on the TAIEX starting today, Chinese-language media reported yesterday.

An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date. An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties, according to Chicago Board Options Exchange.

Listed options have been available in the US since 1973.

The option offered by Taiwan Futures Exchange is an index option on TAIEX, which can be used as a hedging tool for investors, especially institutional investors, to protect their investment position.

According to Taiwan Futures Exchange, seven firms will be dealing with the new trading derivative -- Polaris Securities Co (寶來證券), Polaris Futures Co (寶來期貨), Jih-sun Securities Co (日盛證券), Jih-sun Futures Co (日盛期貨), Fuhua Securities Co (復華證券), KGI Securities Co (中信證券) and Entrust Securities Co (永昌證券). An analyst said that when investors are more familiar with the new trading tool, trading volume in index options could rise to 10,000 contracts a day.

"It will take about three months for investors to get acquainted with the index options. During the initial period, the [seven] market makers will be responsible for creating market liquidity. Following the initial period, trading volume could rise to more than 10,000 contracts a day. It will pave the way for options on individual stocks later on, which will mean an even larger market," Thomas Huang (黃正雄), president of Jih-Sun Futures Co (日盛期貨), was quoted as saying.

"Compared with other financial products, index options are a better trading tool to control investment risk, and have lower trading cost and more flexibility," Huang said.