Dear Fast Break Reader,
Today's article is a slight departure from the usual format of trade recommendations and directional bias. However, what you will learn from this article are the facts behind the most actively traded contract in the world, the KOSPI 200 Options market. If liquidity is the lifeblood of the derivatives trader, then the ranking heavyweight deserves your attention.
What is a KOSPI 200 Option?
The KOSPI 200 option is based on the KOSPI 200 futures contract. Both take their cues from the underlying index of 200 stocks traded at the Korea Stock Exchange in Seoul. The KOSPI options and futures contracts are traded at the Korea Futures Exchange.
Contract Specs for KOSPI 200 Options
| Underlying Asset: | KOSPI 200 Index |
| Trading Unit: | One contract |
| Contract Months: | The three consecutive near months plus one nearest from the cycle (March, June, September, and December) |
| Trading Hours: | 09:00
- 15:15 (Monday - Friday) 09:00 - 14:50 (Last trading day) |
| Exercise Style: | European |
| Multiplier: | KRW 100,000 |
| Tick Size and Value: | 0.05
point (KRW 5,000) for 3 point or more premium 0.01 point (KRW 1,000) for less than 3 point of premium |
| Options Strike Interval: | 5.0 points
for the contract months from the quarterly cycle 2.5 points for the others |
| Last Trading Day: | Second Thursday of the contract month |
| Final Settlement Day: | The following day of the last trading day |
| Settlement Method: | Cash settlement |
How does the KOSPI 200 Options contract stack up against the rest of the world?
Based on the Futures Industry Association's January/February 2004 Issue of the Futures Industry Magazine, not only has the KOSPI 200 Options contract grown dramatically over 2003 figures but global volume has increased in almost every sector of the futures and options industry as well, with most growing by close to a third. Without a doubt, equity indices have grown the most over the last year. The FIA reports that even barring the powerful KOSPI 200 Options, global equity trading increased by nearly 200 million contracts from 2002 numbers. The king though is the KOSPI 200 Options contract, which showed a gain of over 865 million.
Top
20 Exchange-Traded Derivates Contracts Worldwide
(In millions of contracts traded)
Who trades the KOSPI 200 Options?
According to The Korea Times, investors outside of Korea have become more active in the Korean financial derivatives market. As the KOFEX strives to globalize its products, the impediments to trade continue to come down. It reported that foreign investors comprised 18.2 percent of the trading total for the month of December 2003. As for the question of institutional versus individual investors, nearly half (48.8%) of the options market is comprised of individual investors over the same time period. Upon looking at the trading statistics, it appears that the KOFEX is on a similar path to that of the other global trading behemoth, Eurex. It was not that long ago that few US traders had even heard of the Bund or the Eurex. Data was difficult to come by and the prospect of applying a chart, much less a trading system was daunting. Now, the Eurex is in our own backyard and old standbys like the Thirty-Year Bond on the Chicago Board of Trade have been pushed to the side. Further, with nearly half the volume in the hands of individual investors, this is not just in the domain of fund managers adjusting positions and hedging portfolios.
The volume is impressive, but what does it really mean?
With average daily volume of nearly nine million contracts in January 2004, the question becomes that of value. Is the KOSPI 200 option akin to trading a penny stock? Lets start with some basic conversions and baseline numbers.
The first fact to understand is that the KOSPI 200 options contract is traded in Korean Won (KRW). If you are new to trading non-US futures and options contracts, it is important to know that when you enter into a position in a non-US futures or options contract, a portion of your brokerage account will be converted over to the appropriate currency, in this case Won. For example, if you purchased some KOSPI 200 options worth 2.3 million Won, that equates to roughly $2,000 US Dollars. Your brokerage firm would convert your US Dollars into Won to cover the options position. The twist is that you are not only subject to market risk of those options but that of the Won versus the US Dollar. Obviously, this can work for you or against you. The key is to understand this fact before you invest, and not find out later as you track down a mysterious loss or gain.
Conversions
$1 US Dollar = $1,172 Korean Won
One tick in the options (3 points or more of premium) for example is equal to 0.05 point, or KRW 5,000. Thus, at the current level of conversion, one tick is worth approximately, $4.26 US Dollars. Compare this to the S&P 500 E-Mini contract with a minimum movement of $12.50 USD.
Continuing the comparison of the KOSPI 200 Options and the familiar US index benchmark, E-Mini's, lets take a look at an average day in the market.
As of this writing, the most actively traded option is the March 2004, 122.50 Call, which settled at 0.21 and had a range of 0.26 to 0.14. 2,234,137 of these were traded. Impressive, but what is that really worth? At a settlement of 0.21, a Call option is worth only $17.90 USD. The daily range, at only eight ticks ($6.82 USD) is also a tiny number on an individual basis. Compare this to a 300-point move for the E-Mini on the same day, a worth of $150.
Is this an apples to apples comparison, not exactly. But, the KOSPI 200 Options contract has few comparisons here in the US.
Conclusions
The overwhelming thing that comes to the forefront is that if trends and liquidity are two things to look for when looking for an investment vehicle, the KOSPI 200 Options contract may deserve more than a token tire kick. Even with the somewhat diluted figures in terms of the value behind all of that volume, the trend of growth in this market appealing. Foreign investment in this market was non-existent not that long ago, thus in practical terms this market may be still in its nascent stages. This trend of growth may just be getting started.
In terms of liquidity, it is hard to argue with the illustration above in light of a single option moving over 2,000,000 contracts in one day. If a frequent complaint of options traders is a lack of liquidity and an inability to get their orders executed, this may be a market for them.