On December 2, 2019, Huaxia SSE 50ETF will deliver dividend and be ex-dividend, and the exercise price and contract unit of the original contract will be changed. Based on the changes of options market before and after the dividend of 50ETF, and combined with theoretical analysis, this paper summarizes the impact of 50ETF dividend on general options trading for investors.
(I) call options: leverage up
Strictly speaking, the leverage of the call option is the ratio of the percentage change of itself to the percentage change of the underlying price. According to the formula, the leverage of the option can be derived as follows:
Leverage ratio of 1 lot option contract=contract unit*|unit Delta|*underlying price/ option premium
According to the above discussion, we know that after the 50ETF dividend, the change range of the underlying price, exercise price and option premium are equal, and the ratio between the two is constant, so the change of leverage ratio is mainly caused by the change of contract unit. Therefore, the change rule of leverage caused by dividend is as follows:
Leverage ratio after change =old leverage ratio * underlying closing price before ex-dividend day/( underlying closing price before ex-dividend day-cash dividend)
Therefore, after 50 ETF dividend, the leverage ratio of the adjusted contract increases. For investors who buy options, the leverage of the contract becomes larger. In order to ensure that the risk does not expand, investors can properly close some contracts, or exchange the number of positions to standard contracts.
(II)Put option: expansion of directional risk exposure
We analyze the impact of 50ETF dividend from the perspective of the return and risk of put option. First of all, the maximum return on put options is equal to the premium of each contract. We know that after the ex-dividend date adjustment:
New Contract Unit * New Premium= Old Contract Unit * Old Premium
This shows that the premium of each option remains unchanged, i.e. the maximum return of the put option remains unchanged. For the daily risk and return of put options, we need to analyze it from the perspective of Greek alphabet. 50ETF dividend will affect Greek alphabet from three aspects: the underlying price will be reduced, the exercise price will be reduced, and the contract unit will be increased. Here, we omit the specific derivation and give the change results directly:
Delta after adjustment= old Delta * underlying closing price before ex-dividend day/( underlying closing price before ex-dividend day-cash dividend)
Gamma after adjustment= old Gamma * [underlying closing price before ex-dividend day/( underlying closing price before ex-dividend day-cash dividend)]^2
Vega after adjustment=old Vega
Thea after adjustment=old Theta
It is not hard to see that Theta before and after the adjustment remains unchanged, indicating that the daily earnings of put options remain unchanged. Vega also did not change, indicating that the volatility risk exposure remained unchanged, but the Delta and gamma of the portfolio rose, indicating that the directional exposure increased.
Therefore, after 50 ETF dividends, the return status of put options remains unchanged, and the volatility risk exposure remains unchanged, but the directional risk exposure becomes larger, so investors should consider reducing positions appropriately to reduce the risk.
In addition, it should be noted that the increased risk is for the same price change. For example, for the same change of 0.01 yuan, the corresponding price change proportion after dividend is greater than before dividend, so it increases the risk of put option. But for the same yield change before and after dividend, the risk of put option does not increase because of dividend.
(III) The liquidity of the adjusted contract plummeted
On the day of ex dividend of 50ETF in 2016 (November 29, 2016), Shanghai Stock Exchange added standard contracts. By comparing the trading volume of the adjusted contracts whose exercise price is closest to the standard contract (for example, "50ETF call 2.40 January 2017" and "50ETF call 2.397A January 2017"), we found that the liquidity of the original contract gradually decreased, and the liquidity of the standard contract gradually increased. About a month later, volume was dominated entirely by standard contracts.
We calculated the ratio of 5-day cumulative volume of standard and adjusted contracts, which gradually increased from 1 to 4 after about 25 trading days, and stabilized at this level until the contract expired. The above facts show that the trading volume of options will gradually transfer from the adjusted contract to the standard contract, which will take about one month.
After the ETF dividend, not only the trading volume will gradually shift to the standard contract, but also the investors will gradually move their positions to the standard contract, which is reflected in "position shifting".
As shown in the figure below, from November 29, 2016 to December 28, 2016, the positions of standard contracts increased from 148000 to 739000; the adjusted contracts decreased from 657000 to 314000.Both of them are changing with each other, and the trend of moving is obvious. From the aspect of ratio, the phenomenon of move is more obvious. From November 29, 2016, the ratio of positions in standard and non-standard contracts basically kept rising, rising from 0.22 to about 9.
Therefore, after the dividend and ex dividend of 50ETF, the trading volume and position of the original contract will be significantly reduced, and the liquidity will become poor. It is suggested that investors change the contract position into a standard contract.
(IV)"Reserve opening" need to pay attention to the shortage of reserved securities
After this adjustment, the contract unit will become larger, so it may cause the investors who "prepare to open positions" to have insufficient reserved securities. In 2016, for example, if an investor opened 100 lots reserved position and held 1 million lot reserved securities on November 28, after the ex-dividend of November 29, the securities used for the reserve lock-in became 1 million 50ETF funds and some cash, because the contract unit became 10220, in order to meet the reserve requirements, the number of reserved securities required should be 1022000, and the investor had 2.2% gap needs to be filled in time.
If there is a shortage of reserved securities, the investors need to close their positions in time or supplement the reserved securities on the same day (before the closing of December 2, 2019, they need to buy enough 50ETF and lock them up, otherwise they will face compulsory closing).