Options trading is coming to the PSX

Derivatives trading is not new to the stock exchange. In the past, the market has introduced standardized contracts for deliverable and cash settled futures which have seen interest from the investors as it provides a different risk profile and return compared to deliverable ready market investment. As the exchange looks to broaden the products being offered, single stock options seem to be the next investment avenue being considered.

Since June 2021, the Pakistan Stock Exchange has been in talks with the stakeholders of the market to introduce a regulatory framework governing the single stock options contracts market. The consultations are being conducted under Section 7 of the Securities Act 2015 which would allow single stock options to be introduced and traded on the market.

A week ago, the fifth session of the talks was carried out to design the mechanism according to which trading would be conducted. 

For decades, there has been an understanding that the stock market is primarily driven by traditional equity investment, speculative and risky trading where individuals and corporations carry out their investments. These investments are impacted by the financial health of the companies and the macroeconomic shifts experienced by the country. This traditional understanding of trading meant that investment was on deliverable basis as the investor would get to own the asset.

As the capital markets of the country mature, there is a realization that investors want different profiles or risks which allows them to hedge their exposure and only pay for the part of the product which they feel is providing them the proper hedge. This also means that they are only willing to pay for the risk that they want and are willing to forgo complete exposure to a financial instrument. This is where derivatives are used. Just like the futures market, the financial instruments being used in an option market has its value tied to an underlying asset. As the value of the asset moves, so does the price of the derivative product.