Friday, January 24, 2014

HSI Index Option Review

I want to trade another market/product in addition to K200 Index Option to diversify.  With that, I start to explore Hong Kong Hang Seng Index Option.

Basic Option Spec: (http://www.hkex.com.hk/eng/prod/drprod/hkifo/options.htm)

  • Exercise Style : European
  • HSI Option is HKD 50 per index point
  • Minimum Spread : 200 point, ie HKD 10,000 (~USD  1,288.94)
  • Trading Hours is 9:15m - 12:00noon & 1:00pm - 4.15pm



Cost of Trading
1. Market Data HKD 40.00 HKD (~USD 5.16)
- Hang Seng Indices HKD 15.00
- HKFE Deriv HKD 25.00
- Korean Stk Exch Deriv Free

IB market data is generally cheap.  While USD 5.16 market data per month is not expensive, it is relative more expensive than other exchanges.  For example, Korea is free, Singapore is SGD 1.00 (~USD0.78) and US Bundle (USD 10.00)  & US Options (USD 1.50) are waived when monthly commission generated reached USD 30.00 & USD 20.00 respectively.

2. Commission
- HKD 30.00 (~USD3.86) per contract
- 0.2% of option value, min KRW 1,000 (~USD 0.93) per order

For a 10% premium collected from Credit Spread,
- HSI commission will take 6% away from the 10% premium received, ie for every $100 premium received, $6 will be deducted for commission.
- K200 commission will only take about 0.76% (depending on contract value) from the premium, ie for every $100 premium received, only about $0.76 is deducted for commission.

3. Margin
- for a HSI Option 200pt Spread (min spread), the Initial & Maintenance margin is about USD 1,201 & USD 961 respectively
- for a K200 Option 2.5pt Spread (min spread), the Initial & Maintenance margin is about USD 637 & USD 510 respectively

For HSI Option, selling a 200pt Spread to receive say 20 pt (10% min premium) is about HKD 1,000 (~USD 128.81), I will need to tied up USD 1,201/961 initial/maintenance margin.  Return On Margin (ROM) is 10.72%/13.40%.

For K200 Option, selling a 2.5pt Spread to receive say 0.25 pit (10% min premium) is about KRW 125,000 (~USD 115.75), I will need to tie up USD 637/510 initial/maintenance margin.  Return On Margin (ROM) is 18.17%/22.69%.

4. Option price spread and volume
K200 Option spread is generally about 2 ticks wide.  Selling at midpoint has been generally successful.  The Bid and Ask volume is also good.

However, HSI Option spread is about 4 ticks wide.  Selling at midpoint has been not successful.  The Bid and Ask volume is also comparatively lower.




Risk/Reward
1. Spread Risk
- min spread is 200 points, which equate to HKD 10,000.00 (~USD 1,288.94)
- K200 min spead is 2.5 points, which equate to KRW 1,250,000 (~USD 1,165.39)
- this is about the same

2.  Support & Resistance
- as my selection of Strike is primary base on Support & Resistance, the validity of Support & Resistance is important
- HSI gaps up & down very often.  This make the Support & Resistance not so reliable.  Very unpredictable.  This inherently results in higher risk.
- In addition, the up & down swing could be 300-500, even 700 points in one day!


Conclusion
HSI Option is not easy to trade as there are too many gaps up & down.  And the up & down swing is huge.  This make selection of Strike extremely difficult.  It is thus more risky.  The short strike could be hit easily.  In addition, for the same USD 100 premium received, I will need almost twice the margin as compared to K200.  Not to mentioned, the commission and market data fee is higher.
Therefore, HSI Option is not a suitable market/product for me to trade (at least for now).  I will need to expore some more market/product, such as Japan or Europe Options.

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