Johannesburg Stock Exchange launches options for the retail investor

Johannesburg Stock Exchange launches options for the retail investor

27/07/09

Today, the JSE launched equity options for retail investors. Retail Equity options include Single Stock Options on the top twenty companies in the FTSE/JSE Top 40 Index and Index Options on the Top 40 Index itself. Smaller contract sizes bring new affordability to the options market in South Africa and open it up to the man in the street.

“The JSE has a well-established wholesale options market catering for institutional investors, but we have never focused on the retail investor before,” comments Allan Thomson, Head of Derivatives trading at the JSE. “Options provide numerous benefits to retail investors and are especially relevant in these turbulent economic times.”

The main point to remember about options is that they grant the investor the right but not the obligation to buy or sell an underlying asset at a predetermined price at a set date in the future. “In layman’s terms, the investor can decide to abandon the contract if the price is not in his or her favour,” comments Thomson. “Of course, like an insurance policy, the investor will pay a premium for this peace of mind.”

Equity options can benefit the investor in the following ways:

  • They can be used to protect the value of one’s shares from a falling market at an affordable cost. Without using put options (the right to sell), in a market downturn you have no protection against prices declining. Options are often described as the only guaranteed stop loss, as falling markets cannot pass through the agreed price (known as the strike price).
  • Investors and traders can use options to profit from a movement in the underlying shares without the costs of trading the shares themselves. Options give you exposure to movements in the share price for a fraction of the cost of purchasing the shares themselves.
  • They offer investors time to decide whether they want to buy or sell a share. Buying an option enables you to defer your decision until the option’s date of expiry.
  • Index options which are based on a basket of shares as opposed to a single share, provide diversified exposure, without having to invest directly in the many stocks that make up the index.

The market maker Nedbank will be quoting option prices in sizes as small as 5 contracts in 50 point strike intervals for Index Options and 50 cent strike price intervals for Single Stock Options.

This new investment avenue complements the existing equity futures market and will increase both trading volumes and liquidity in market. Like equity futures, options allows investors and speculators to benefit from the movement of the share price, but differ in that they come with a ‘built-in insurance policy’ where the investor is able to resign a contract at any point in the contract term.

As with purchasing a futures contract, investors will need to use their existing Futures account or open a SAFEX account with a broker.