Trading futures vs options in Hong Kong

Hong Kong is an important financial hub in Asia with substantial trading activity in the futures and options markets. It has become an attractive alternative for many traders due to its proximity, low costs and future-friendly regulations. Hong Kong’s top role in the global economy makes it a good location for hedgers who need access to commodities at competitive prices.

There are some key differences between buying futures vs options in Hong Kong:

Trading Contracts for Difference ([CFDs) or Other Derivatives (OTC)

In Hong Kong, there are no laws regulating retail foreign exchange contracts [including CFDs], which allows many forex brokers to open a subsidiary on the island and avoid regulatory oversight from their country of origin. As a result, these brokers can offer their customers a wide range of derivatives and OTC products.

This may appear to be an attractive prospect at first glance, it is essential to note that these unregulated contracts introduce additional risk into the market. Once you buy or sell a CFD contract, for example, there’s no daily settlement like with futures and options – instead, you will need to monitor your margin requirements closely as the value of your position changes over time.

Hong Kong Futures Exchange (HKFE)

The Hong Kong Futures Exchange (HKFE) was established in 1969 as a non-profit organization that facilitates price discovery and hedging opportunities by issuing futures on several types of commodities such as gold and cocoa beans. These futures provide an excellent way to lock in prices and limit volatility for companies that need to hedge their exposure.

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The HKFE has a daily open outcry session where negotiations between buyers and sellers determine the price of individual contracts. During this session, market makers who act as brokers attempt to match buy and sell orders on the exchange floor using hand signals.

The clearing is conducted by inter-dealer brokers who ensure that all buyer and seller accounts are settled every day before the close of trading. This adds an extra layer of protection for both parties in addition to reducing counterparty risk (reducing the chances that your broker goes bankrupt or doesn’t have enough capital to pay you). This clearing model eliminates any pre-settlement risk, which makes it an ideal choice for risk-averse traders who are not yet comfortable with the concept of trading OTC derivatives.

Hong Kong Options Exchange (HKOE)

The Hong Kong Options Exchange was established in 2002 to provide local investors access to Asian stock index options at competitive rates. It operates similarly to the HKFE but has an additional feature called automatic exercise, which means that your position will be automatically closed out if the contract you bought is set to expire within three days. Like other institutional markets, expiring contracts are settled on a T+3 basis, meaning that all transactions must be completed before market close on the third day after they were initiated. The exchange also requires brokers to act as market makers and ensure that all orders are filled before 4:00 PM.

The combination of open outcry and automated exercise makes the HKOE a much more attractive choice for seasoned traders who prefer not to rely on exchange-imposed limits. This also means that futures contracts have a different expiration period from those in other markets, as they can only be opened or closed during sessions that occur once every day at 10:15 AM and 2:30 PM.

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Final Word

It is important to note that these contracts do not expire like traditional stock options, which will remain valid until the settlement date. This is a vital distinction to make when comparing them to CFDs, which can be liquidated at any time before contract expiry. While it may seem complicated at first, this flexible structure allows you to trade Asian markets with greater freedom and control over your finances while avoiding the exorbitant fees associated with retail contracts. New traders are advised to use an online broker from Saxo Bank and trade on a demo account before investing real money.