The Taiwan Future Exchange (TAIFEX, 台灣期貨交易所) yesterday listed equity options on the shares of five blue-chip companies for the first time -- Taiwan Semiconductor Manufacturing Co (台積電), United Microelectronics Corp (聯電), Nan Ya Plastics Corp (南亞塑膠), China Steel Corp (中鋼) and Fubon Financial Holding Co (富邦金控).
On the first trading day, a total of 4,558 contracts were signed to purchase options yesterday, according to TAIFEX.
"Our goal is to boost daily transactions to reach over 10,000 contracts and list another group of stocks in three months," TAIFEX chairman Richard Shih (
Options on shares of the first five companies were approved for trading because they met the requisites of market capitalization, liquidity, price volatility and industry coverage, Shih added.
Speaking at yesterday's launch ceremony, Chu Jaw-chyuan (朱兆銓), chairman of the Securities and Futures Commission was bullish on the market, calling it "a mainstream, world-class financial product."
Equity options are securities that give the holder the right to buy or sell a specific number of shares, at a specific price for a certain-limited-time period. In the new plan, one option equals 1,000 shares.
The future exchange is a commodities market where futures contracts in financial instruments or real commodities, such as wheat and soybeans, are traded. Stock, bond indexes and options are also traded on these exchanges.
Trading options on shares allow investors to benefit from the local stock market's (TAIEX) rise and decline for less initial cash outlay than would be possible when trading in underlying shares.
There are generally two kinds of options -- a call option (
A call option gives the right to the buyer of the option to force the writer of the option to sell a particular stock at a prefixed price within a particular period.
A put option gives the buyer a right to force the writer to buy a particular stock at a prefixed price.
For example, investors can buy a call option at a prefixed price in anticipation of a market rise and sell the call option to profit from the actual rise during the contracted one-month period.
"The principle is to buy a call option in anticipation of a rising market and to buy a put option in anticipation of a declining market," said Emily Chiang (江燕琇), an assistant manager with Jih Sun Securities Co (日盛證券).
Traders' gains depend on the fluctuation of stock prices in accordance with their anticipated movement while their maximum losses are pre-paid premiums, and a NT$200 transaction fee, said Mark Hsu (
To grab market share and boost the market, some securities houses have cut the transaction fee down to NT$148 per contract, he said, adding that lower transaction fees are foreseeable due to competition.
Hsu said that the new market could be seen as a haven of futures to avoid risks of stock fluctuation especially for big-time shareholders while it's inevitable that some speculative individual investors may also "gamble on it and make quick gains."
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