Why the world trades options

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Why the world trades options JSE Media Day presentation 2012- August

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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.

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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

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Growth in US Options

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Exponential growth

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20100

500,000,000

1,000,000,000

1,500,000,000

2,000,000,000

2,500,000,000

3,000,000,000

3,500,000,000

4,000,000,000

4,500,000,000

5,000,000,000

Occ Total

Occ Total

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Markets in the US have evolved

From this

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Where people would behave like this

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To this- a lot quieter and calmer and more efficient

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A level playing field

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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 participantsTheir client accounts are more long lived They trade more frequently

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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?

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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.

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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.

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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.

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Data Centres

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Global Connectivity

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Complexity of Outcomes- more high powered trading weapons

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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

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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

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Lopsided Leverage

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Futures – Into WHL Monday the 22nd of August lets buy WHLQ with a futureWHLQ Closed AT 31.63 for a December contractLets buy 10 contracts- Our brokerage would be about R100 And we would have 100 shares *10 = 1000 shares at 31.63 R31,630 of exposureInitial Margin required was R225 per contract so R2250By October 31st the position was valued at R41.66 so R41,660 So you made R10,030 – 31 % ungeared

446% GearedBut if you were wrong and the share price fell you could lose

R10,030!

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WHLQ Option in August

A Cash Settled WHQQ (WHL) call option with a strike of R33.15 was valued at R150 on 22nd of August 2011-so let’s buy 10 for R1500

The futures price was R31.63On October 31st the futures price was R41.66The option was valued at R754- A 402% return on your investment

with a maximum possible loss of R1500

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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.

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Questions

Why the world trades options

Documents

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