Shanghai starts simulated trade in equity options

The Shanghai Stock Exchange has started simulated trading in equity options, part of a drive by regulators to expand investors' risk-hedging options.

Simulated trading began on Thursday morning, the SSE confirmed to China Daily, and more than 60 securities firms took part.

The shares of Ping An Insurance Group Co of China Ltd, SAIC Motor Corp Ltd, the China 50 ETF and the Shanghai SSE180 ETF were used in the exercise.

The exchange-traded funds track the top 50 and top 180 yuan-denominated stocks on the SSE.

In early December, SSE Chairman Gui Minjie told a forum that preparations "are almost complete" for launching options on individual stocks.

Single-stock options are essentially equity derivatives, giving buyers the right - but not the obligation - to buy or sell a stock at a fixed price within a certain period or on a set date, said Tony Sun, a strategist with Shanghai Tebon Fund.

The options "will allow investors to hedge their positions more effectively. We have limited financial instruments now, but as reform continues and China's financial markets become more global, innovation is a necessity," said Sun.

China introduced equity index futures in 2008, and those instruments remain the only equity derivatives in use. The regulators expanded a pilot program in August 2012 to boost margin trading.

In February, a new pilot was launched to enable securities lending and short-selling of blue chip stocks.

"Individual stock options can be seen as a form of insurance that reduces trading risks. However, options trading prices can be very volatile. Investors still have to be aware of the risks caused by leveraging and volatility," said Xiong Jinqiu, an independent financial commentator.