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Published on November 12, 2007

In the beginning, clients have a hard time fully grasping the concept of options, says Alton Lau of Phillip Securities in Hong Kong, who has been shuttling to Thailand as a consultant to the TFEX.

Without a critical mass of knowledgeable traders, liquidity is not quite there yet, said Lau, who was trading options in Hong Kong when they were still using esoteric hand signals and chalk boards.

This is evident in the more than 30-point spread, currently hovering around 640 to 680, for the SET50 Index.

Lau pointed out that in a mature market such as Hong Kong, the spread is much tighter, around three points, which makes it difficult to make a killing.

The nascent options market is then an opportunity for traders.

But it is also important that the three market-makers - Ayudhya Securities, Phatra Securities and KGI Securities (Thailand) - all trade together to create the much-needed liquidity. Ideally, the market should have at least eight to 10 market makers.

Because of the lack of liquidity, more exotic products such as stock options, gold options or even interest-rate options, will just have to wait, since they would absorb all the cash needed to maintain healthy spreads.

A possible direction would be the issuing of SET50 option warrants, to be traded in the stock market. The warrants, issued by the likes of Macquarie and UBS in Hong Kong, would open up risk-management opportunities for traders to hedge their positions.

Unlike other kinds of options, warrants have the same underlying product, which is the index. This would make it an evolutionary next step.

The volume of the derivatives market should at least constitute 70-80 per cent of the cash market. And the volume of the options market should make up 25 per cent of the futures market, Lau said.

With all the hoopla, what it boils down to this is: if options are your thing, now is the time to dabble in them.

Trading is much more convenient online - with 80-90 per cent of options traders using their Internet accounts versus 30-40 per cent of stock traders.

Ki Nan Tsui

The Nation