Shanghai’s Nasdaq-style Star Market to launch options trading linked to ETFs, giving investors hedging choices against volatility

The Shanghai Stock Exchange unveiled plans to launch options linked to exchange-traded funds (EFTs) in the Nasdaq-style US$955 billion Star Market which will offer investors a hedging tool against volatility in China’s second best-performing equity benchmark this year.

The exchange will prepare the ground for options trading under the guidance of the China Securities Regulatory Commission (CSRC) in an important measure to support China’s tech innovation strategy, the Shanghai bourse said in a statement. It did not provide a timeline for the launch.

An option, is a contract that gives the buyer the right to buy or sell a security such as an ETF at a predetermined price within a specific time frame. ETFs, which invest in a basket of securities like bonds, stocks or currencies, offer investors less volatile and more diversified ways of buying liquid, tradeable assets by taking a macro approach to investing.

Hedging demand for Star Market-traded stocks is on the rise as the volatility of its benchmark remains elevated after speculators exited artificial intelligence (AI) trades spurred by the launch of ChatGPT amid a mild economic recovery.

The gauge has lost 12 per cent from its eight-month high struck in April. Still, it has gained 6.9 per cent this year, beating almost all benchmarks that track mainland stocks. Only Shanghai’s Composite index, with a 7.2 per cent gain, has performed better.