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China investors catch option fever, prompting regulator warnings

This article is more than 12 months old

SHANGHAI : A rally that has made China's stock market the world's best performing this year has fed a rush of leveraged bets in the country's stock option market, prompting regulators to warn of rising risks.

Growing interest in China's equity option market came after a contract soared as much as 19,267 per cent in a single session last month.

Data from the Shanghai Stock Exchange shows the number of open contract positions in the ChinaAMC 50 ETF exceeded three million for the first time on record this week as investors hope to take advantage of the equity bull run to land profits.

An option gives investors the right to buy or sell the underlying asset at a set price on a specific date. The ChinaAMC 50 ETF tracks the SSE 50 index, dubbed China's "Nifty 50 index", which has risen more than 20 per cent this year.

Interest has been concentrated in a call option expiring March 27 that gives investors the right to buy the ETF at 3 yuan (60 cents), in effect a bet that the ETF will jump at least an additional 9.5 per cent this month from its closing price of 2.74 yuan on Friday.

If the ETF does not reach the option's strike price of 3 yuan by the expiry date, the option will be rendered worthless.

The speculation has prompted a warning from the Shanghai Stock Exchange.

In a statement on March 8, the exchange noted large volumes, open positions, and price fluctuations on option contracts, and warned investors of the risk that the time value of the option would rapidly diminish ahead of its expiry.- REUTERS

BUSINESS & FINANCE