by Susan Edmunds
NZX equity options will launch on April 24.
It follows the introduction of the NZX20 Index futures contracts in June last year.
NZX will initially launch option contracts on ordinary shares in Fletcher Building, Spark NZ and Trade Me. Options on more stocks will follow.
One option contract gives the buyer the right but not the obligation to buy or sell 100 ordinary shares in the underlying company.
The cost of the option is calculated as a percentage premium, depending on the timeframe of the option and the volatility of the shares.
NZX head of exchange products Sam Stanley said equity options were popular in Australia as a way of enhancing income for investors, using covered call strategies. “If I’m a holder of Spark and I want to generate some income while holding Spark, I might sell a call option in the market. It gives someone the right but not the obligation to buy the shares at a set level above where Spark is trading."
The investor would then make money through the premium earned selling the option and would experience a capital gain if the share price moved enough to trigger the sale.
Stanley said equity options would likely appeal to more sophisticated investors. “Some brokers tend to have more of those in their client base than others. Some will have clients that routinely trade options on other markets and haven’t been able to trade in New Zealand. Brokers now have another product that their client base may want to use to generate income.”
Options can also be used as a hedging strategy to guard against large moves in the market.
Stanley said options were a better retail tool than index futures because they are traded in parcels of 100 shares.
If someone buys an option and does not go ahead with the trade, the option premium is all that is paid.
"It’s like insurance, you’re paying for peace of mind, paying to hedge your portfolio. We initially see this as something more experienced investors would use. It’s not the sort of thing that is going to necessarily have mainstream appeal but what offshore experience has shown is that they can be very popular and there’s no reason why that won’t translate to the New Zealand market.”
Only those who are accredited NZX derivatives advisers can advise on NZX derivatives.
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