2 www.jse.co.za History of options Options have been around for ages the first recorded use was in 322 BC by Thales of Miletus who bought call options on olive presses. An option is a “contingent claim” if X happens I have the right to do Y. This is a very powerful tool compared to futures which is simply an agreement to do Y on a future specified date.
3 www.jse.co.za Global Industry Around the world there has been massive growth in the trade of all derivatives since 1973 Options have been amongst the fastest growing product segments Option trading is more widespread in the US than in Europe or South Africa
11 www.jse.co.za Options Clients in the US Options clients are quite interesting. They are generally the best educated participants in the market with most of them having post-graduate degrees in finance, engineering or the hard sciences They are older than average participants Their client accounts are more long lived They trade more frequently
12 www.jse.co.za Think Or Swim The largest online retail options brokerage in America in 2009- Thinkorswim was sold to TD Ameritrade the biggest online stock brokerage for 606million dollars. Their clients only had assets under management of 2.9billion USD This was the most ever paid for a retail brokerage on a per customer and per dollar AUM basis Why?
13 www.jse.co.za Why so much? “Ellis said Thinkorswim, with about 94,000 clients and $2.9 billion in client assets, has clients who trade, on average, 450 times a year. He said that drives about 60% of Thinkorswim's revenue.” Their ARPU’s were amazing hence why it was worth paying so much for them.
14 www.jse.co.za Another Reason At the time Thinkorswim also offered the best trading platform and risk management tools for options which would help TD ameritrade to grow their business. Increasingly around the world Technology is becoming more and more important in trading.
15 www.jse.co.za Technology The JSE is building a new data centre to host trading functions for many members. My team had quite a funny chat with some High Frequency Traders in London who were worried about the SA governments restrictions on computing power- In Vietnam the government had held up their computers at customs as their computers were so fast and powerful they could be able to break government codes easily. This has created an arms race for bandwidth and computing power in financial markets around the world.
18 www.jse.co.za Complexity of Outcomes- more high powered trading weapons
19 www.jse.co.za What has driven this growth? Options are an amazingly flexible and useful tool because they can be combined to create unique payoff profiles Options can be very profitable for those writing them if they manage their risks correctly Options can leave you with upside if things move in your favour
20 www.jse.co.za Keys to success The key to success in growing derivatives markets and especially options markets is education, education, education In the US the industry as a whole all pays a levy to the Options Clearing Corporation- OCC for clearing and to the OIC- Options Industry Council for education Competition, transparency and electronic markets
22 www.jse.co.za Futures – Into WHL Monday the 22 nd of August lets buy WHLQ with a future WHLQ Closed AT 31.63 for a December contract Lets buy 10 contracts- Our brokerage would be about R100 And we would have 100 shares *10 = 1000 shares at 31.63 R31,630 of exposure Initial Margin required was R225 per contract so R2250 By October 31 st the position was valued at R41.66 so R41,660 So you made R10,030 – 31 % ungeared 446% Geared But if you were wrong and the share price fell you could lose R10,030!
23 www.jse.co.za WHLQ Option in August A Cash Settled WHQQ (WHL) call option with a strike of R33.15 was valued at R150 on 22 nd of August 2011-so let’s buy 10 for R1500 The futures price was R31.63 On October 31 st the futures price was R41.66 The option was valued at R754- A 402% return on your investment with a maximum possible loss of R1500
24 www.jse.co.za Flexibility Options can offer the hedger, speculator or arbitrageur a wider array of investing tools and more ways to profit or manage risks in any market conditions.