What are Listed Options in Singapore?

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Options trading is a type of derivative trading, which gives the buyer a right but no obligation to buy or sell an underlying security at a fixed price within a specific time frame. The Singapore listed options market began as part of the larger Asian option markets that developed after the Chicago Board Options Exchange started its first Asian office in Tokyo in October 1981.

In 2002, CHIO merged with SGX and renamed SESDAQ before becoming the MSM in 2007. Singapore listed options were introduced in November 1983 following changes to the Securities Industry Council’s (SIC) regulations for over-the-counter derivatives. It allows multinational corporations (MNCs) to list their foreign currency options on the SICOM. Check out saxotrader for listed options you might be interested in.

Traded options contracts in Singapore

Singaporean Dollar (SGD) and other currency futures, three-month Interest Rate Futures (IRFs), and three-month Currency Futures (CRFs). These were later supplemented by options on four STI ETFs — SPRING Singapore Index, MSCI Singapore Investable Market Index, Nikko AM STI Mid Cap and Nikko AM STI Micro-Cap.

Options trading became so popular in the 1980s that it soon overtook Single Stock Futures among all SICOM products. At one point, about 70% of investment turnover was contributed by derivatives markets compared with 10 – 15% for stocks. The majority of the derivative trading volume comes from foreign currency options and interest rate futures, which account for around 70 – 80% of total turnover.

Licensed exchange

Singapore listed options work the same as other standard options trading. The critical difference is that Singaporean Listed Options are traded through a licensed exchange instead of over-the-counter (OTC) markets. It means all transactions must go through a sale or bank counterparty, allowing easier regulation and enforcement. Since 1991 market makers have been required to quote two-way prices during regulated hours, although they may choose not to offer quotes at their discretion outside these times.

American Style or European Style

When you buy a listed options contract, you choose American Style or European Style. In the American style, one can exercise the option anytime between purchase and expiration. In European Style, you can only exercise at expiry. This style is used to reduce trading volume during Singapore options settlement.

Difference between Singapore Listed Options and STI ETF Trading

The other significant difference between Singapore Listed Options Trading and STI ETF Trading is that while one buys or sells units in the case of an ETF, the buyer owns a proportionate share of each stock, making up these index funds based on his strategy. The value of such correspondingly rises and falls like individual stocks with supply and demand for them.

As they grow, their weighting increases in the Index; as they fall, their weighting falls in the Index. These index funds are not traded on exchanges but through real-time feeds directly from the Index providers. The STI ETFs do not pay dividends as such. Still, the index components that comprise the STI ETF issue dividends and those dividends are automatically reinvested in additional units. This feature is designed to keep the price of STI ETFs closely tied to its Net Asset Value (NAV).

Expiry day

Singaporean Listed Options contracts will expire at 10:00 am on the third Friday of each month like all other futures or options contracts.

After expiry, Singapore listed options shares will settle at their intrinsic value, determined by an equity-style exercise of a stock options product. Similarly, they would then be delisted from the exchange after settlement and transferred into the Electronic Clearing System (ECS)for final payment.

Out-of-the-money expiry

If the option expires out-of-the-money, it will result in a cash settlement to prove that this derivative contract has been extinguished. This process is similar to the American Options exercise, where one would receive cash equal to its intrinsic value. However, if you were early and exercised your options before expiry, you would be required to make additional payments called early exercise premium for an option bought or reduce the amount received from the early exercise of a call by a certain percentage for a put option.