China launches first equity options, investors bet stock prices to rise

China launched its first stock options on the Shanghai Stock Exchange on Monday, offering investors a new hedging tool for trading index heavyweights, which regulators long have hoped to boost.

The options are based on the exchange-traded fund (ETF) that tracks the SSE50 index, composed of the 50 most heavily weighted stocks on the bourse.

Regulators are essentially guiding investors into blue chips, which most retail investors have avoided in favour of smaller firms, whose valuations have been pushed up.

Components in the SSE50 index have average price-to-earnings ratio of 10 times, compared with 17 times for the broader market.

At the start, 40 contracts for March, April, June and September have been listed.

Options will allow investors to hedge their investments but may also expose speculators to heavy losses. The premium is the price of option contracts, or the money that investors pay to own option rights.

In mid-morning trade, the premium of the call options of the lowest exercise price in March 2015, the most active contract early Monday, was quoted at 0.174 yuan, lower than the exchange's pro forma base premium of 0.1812 yuan.

The premium for the corresponding put options rose to 0.0823 yuan from the exchange base of 0.0788 yuan.

Time is needed

Other contracts generally showed similar trends, while the underlining assets, the China SSE50 ETF, rose 0.4 percent around mid-morning, to 2.3 yuan.

"The movements show investors tend to believe that China's blue chips are more likely to rise than fall in the short and medium term," said Zheng Weigang, head of the investment at Shanghai Securities.