Stable operation in the first month, high market participation
As of January 9, 2020, iron ore options have been running for 23 trading days in the first month of listing, with a cumulative unilateral trading volume of 505,000 lots, a turnover of 1.18 billion yuan, and an average daily open interest of 77,000 lots. Among them, the volume and open interest of call options and put options were 269,000 hands and 236,000 hands, respectively, and the volume of options accounted for 2.5% of the underlying futures.
Among the 11 listed iron ore option series contracts, the 2005 series was the most active, with a trading volume of 405,000 lots of this series, accounting for 80.3%. Followed by the 2002 and 2009 series, accounting for 12.9% and 5.5% respectively. Hong Guosheng, head of the options department of SDIC Essence, believes that the trading volume of iron ore options is stable, and the daily trading volume of options accounts for 2%-5% of the underlying futures trading volume, which is equivalent to the initial launch of soybean meal options in 2017.
At the same time, the open interest of iron ore options showed an overall growth trend after the listing. On January 9, the open interest was 99,000 lots, an increase of 582% from the first day of listing. In this regard, Cai Yuanqi, an iron ore researcher at Guoxin Futures, told reporters that the holdings of iron ore options have gradually increased in the past month, indicating that steel companies and investment institutions have more recognized option tools.
The good liquidity of iron ore options in the first month of listing is inseparable from the experience accumulation, system optimization and market cultivation of DCE since the listing of soybean meal and corn options. The design of iron ore options contracts and systems fully draws on the experience of existing options, stock options clients directly obtain trading rights, and all parties are more familiar with the trading rules. In addition, in the initial stage of soybean meal options listing, a strict limit of 300 lots was implemented. With the smooth operation of the options market, DCE has successively increased the standard for futures rights to 40,000 lots in order to meet trading needs. The right position for iron ore futures starts from 40,000 lots, which is consistent with soybean meal and corn options. A moderately loose position limit is conducive to the function of options.
Stable volatility and effective function of market maker
Since the listing of iron ore options, the implied volatility of each contract has been within a reasonable range. The implied volatility of the 2005 contract series ranges from 22.6% to 26.4%, which is basically stable. Hong Guosheng believes that this has something to do with the recent slowdown in the volatility of futures prices, and it also reflects the rationality of option pricing.
From the perspective of the implied volatility of a single option contract, the implied volatility of I2005-C-650 with the largest call option holdings fell from 25% on the first day of listing to 20%. The implied volatility of I2005-P-560, which holds the largest amount of put options, rebounded and remained at 28%-30%. "The implied volatility of put options is higher than that of call options, indicating that the market has bearish expectations for mine prices." Cai Yuanqi said.
From the perspective of market makers' participation, since the listing of iron ore options, 12 market makers have better fulfilled their obligations of continuous quotation and response to quotations, effectively promoting the formation of reasonable prices in the market. Dong Jingbo, general manager of Galaxy De Rui Capital Management Co., Ltd., one of the market makers, said that market makers make quotations at the first time, provide investors with volatility recommendations, and provide sufficient liquidity for the entire market. From the results, the bid-ask spread of the continuous quotation option contract is less than 1/10 of the exchange requirement, and the number of quotations is also sufficient.
Risk hedging function is beginning to show multi-strategy participation of enterprises
After the listing of iron ore options, industrial enterprises and investment institutions actively participated in the options market with rich hedging strategies and diversified trading models. In terms of market structure, the proportions of transactions and positions held by corporate clients in the first month were 74% and 72% respectively.
"From the perspective of trading experience, the scale and market depth of iron ore options are good. The main contract has more than 10,000 holdings, which is convenient for industrial enterprises to participate in transactions and hedge risks." Guan Dayu, general manager of the option service department of Relian Group Point out that the combination of futures and options instruments can derive many trading strategies, such as long cover (long futures order + sell call), short cover (short futures order + sell put), long insurance (long futures order + buy and put), short Insurance (short futures order + bullish buy), etc.
In the eyes of relevant parties, as the iron ore options market matures, companies can use more flexible and rich hedging strategies to achieve stable operations. Hong Guosheng analyzed that the current low intensity of hurricanes in Australia is a common seasonal phenomenon and should not be over-interpreted. At present, steel mill inventories have been replenished to a relatively high level, and the risk of falling prices must be prevented. For the selling period hedging company, it is possible to sell out-of-the-money call options based on the amount of spot inventory, and adopt an option covering strategy to resist a certain downside risk while retaining room for profit growth. For companies with long-term hedging, they can buy out-of-the-money call options to avoid the risk of potential price increases while preserving the possibility of spot returns when prices are falling.
Cai Yuanqi also stated that under the expectation of limited room for iron ore prices, companies holding spot iron ore can buy put options with an exercise price near the cost line to protect their spot positions. Moreover, the loss of time value of May option contracts is slow. If the market changes, companies will have more trading space.
Consolidating the "One-All-Two-Connect" basic iron ore option has a bright future
The reporter learned during the interview that after iron ore options landed steadily, iron ore took the lead in realizing a complete system of futures, options, and swap tools, connecting the spot and futures markets, and connecting the domestic and overseas markets to the new “one all and two connections” pattern. Relevant sources pointed out that due to the huge import volume of iron ore, the strong industrial foundation and frequent price fluctuations, the iron ore option, which is the last piece of the new pattern of “one all-two-way”, has huge room for development.
"In the future, with the expansion of the scale and influence of the iron ore options market, option volatility curves, open interest, and prices will better reflect investor expectations and bring more positive effects on futures. Iron ore spot, futures, Options are integrated and complementary to each other, and jointly exert the functions of derivative price discovery, risk hedging, and asset allocation." Guan Dayu said.
“Last year, the price of iron ore fluctuated sharply, which had a significant impact on the performance of steel companies.” According to Cai Yongzheng, chief futures analyst at Jiangsu Nangang Steel Spot Trading Company, iron ore options are the first on-the-spot options in the steel industry. , Traders provide new risk management tools, and it is also convenient to develop new businesses such as rights-containing trading, which is of great significance to the industry.
Chen Duyi, manager of Zhejiang Baitai Huaying Investment Management Co., Ltd., who participated in the first month's transaction, believes that the listing of iron ore options has further enriched the iron ore derivatives market system and is beneficial to the development of the steel market and the financial market. "I hope that more options tools will appear in the future to better serve the steel industry chain."