The Hong Kong Exchange (HKEX) will be launching weekly index options on the Hang Seng Index (HSI) and the Hang Seng China Enterprises Index (HSCEI) on September 16 in response to growing risk aversion from investors.
While HKEX has been offering monthly options on both indices, the long-term nature of these monthly index options makes them less versatile and flexible in highly volatile markets where investors want the ability to trade in and out quicker within shorter time frames.
“The introduction of these two weekly options, which are plain vanilla options contracts that expire every week, will enhance the trading needs of investors, optimizing their risk management capabilities. The contracts can be used to manage positions in response to short-term or specific events such as economic figure announcements and have a short time to maturity and relatively low option premium,” says Alexander Siu, senior vice president and co-head of Equities Product Development, Markets Hong Kong Exchanges and Clearings Limited.
Trading data from the HKEX indicate that the market has become increasingly volatile, particularly during shorter time frames since last year.
From January 2 to August 13 2019, for example, the 5-day realized volatility of the HSI ranged from 5% to 35% which is much higher than its 30-day realized volatility that ranged between 13% to 22%. In the same period, there were seven days when the HSI went up or down more than 2%, making it more volatile than the US market.
“This has been an ongoing trend since 2017 when the global markets were historically un-volatile. Globally, we’ve been in an era of more active volatility. This means that there is more need to manage short-term risk. Weekly options are very applicable to our global environment where there’s a lot of short-term risks,” Siu says.
Two weekly index options contracts are provided at any time: a spot week contract that will expire on the last business day of the current week, and a next week contract that will expire on the last business day of the following week. However, no weekly index options contract will be introduced if its expiry day is the same as the expiry day of the spot-month contract.
In addition to being useful as a hedging tool for short-term trading strategies, weekly options also offer lower premiums allowing retail investors to trade with less capital due to less time value compared to monthly options.
Weekly options also have fast time decay (options lose value fast as time passes) compared to monthly options making them attractive to investors who seek options premium income in a stable market environment.
Investors can also arbitrage between weekly options and monthly options, thus providing an investment opportunity.