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Saudi Exchange’s Introduction of Single Stock Options to Woo Global Investors

by Deon Nielsen
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RIYADH: Saudi Exchange’s newest offering, single stock options, is well positioned to draw additional international investment to Tadawul, an official at the body told Arab News.

Since the introduction of the derivative market at the exchange in 2020, investors have seen a multitude of avenues to diversify their portfolios.

The most recent addition of single stock options can be particularly appealing to international investors who are familiar with options trading and seek to protect their investment against market volatility, acting Chief of Derivatives at Saudi Exchange Nayef Al-Athel told Arab News.

There are certain criteria that international investors weigh up when considering investing, most notably the overall sophistication of the capital market, liquidity, and risk management, he added.

He noted that the introduction of the derivatives market was a “landmark” in the ongoing effort by the entity to advance the Saudi capital market and appeal to international investors, putting it on par with the global market.

Within their inherent function, single stock options can serve investors globally as a means to potentially boost profitability by providing a window into market movements while simultaneously reducing risk.

As standard option contracts with an individual stock as an underlying asset, options “offer investors the ability to manage risks by hedging their positions or taking advantage of market movements,” Al-Athel said.

Loai Bafaqeeh, head of the securities division at Saudi National Bank, told Arab News that the introduction of the single stock options is expected to add to the depth and potentially reduce market volatility.

He added that it could also lead to greater demand and interest in related services such as securities borrowing and lending.

“We believe it is a very important addition to the derivatives market which will support greater interest and potential trading activity from local and international clients who would like to trade in these instruments over the course of time,” he said.

“Such trading instruments would definitely make the Saudi derivatives market attractive and potentially lucrative for sophisticated investors,” he added. 

The introduction of hedging tools by the market, such as index futures, served to attract more interest from sophisticated institutional foreign investors and help build institutional capabilities in Tadawul.

Nayef Al-Athel, acting chief of derivatives at Saudi Exchange

The SNB official pointed out, however, that in some cases, options can introduce some level of volatility when the open interest or exposure in options is significant compared to the average daily volume of the security.

Thus, the overall role of market makers in both a security and single stock option serves to help mitigate and reduce extreme volatility and lead to greater depth and natural liquidity in both the derivatives and equities market, Bafaqeeh outlined.

Market making is one of the key success factors which was recently enabled through the new regulations issued by Saudi Exchange, according to Bafaqeeh.

SNB Capital currently acts as a market maker for index futures. The role of derivatives market maker supports greater interest and potential trading activity from clients who would like to trade in these instruments over the course of time, he added.

Bafaqeeh said: “While equity markets benefit from natural buyers and sellers which add depth to the order book even in the absence of a market maker, the derivatives market requires a market maker for continued success and consistent depth of liquidity which is why we have focused on being the first in this area.”

Al-Athel further noted how single stock options are a leverage to boost profitability and gain exposure at a relatively lower capital outlay, allowing investors to pay only a fraction of the notional value of the stocks.

The acting chief of derivatives further emphasized that within the very fabric of options is the unique ability to take advantage of both the upsides and downsides of market movement without owning the underlying stock, through short selling.

Four stocks have been selected from the largest and most liquid companies listed on Saudi Exchange – Aramco, Al Rajhi Bank, STC, and SABIC – to serve as underlying assets.

Despite the worldwide market for derivatives being in the trillions of dollars, the Middle East and North Africa region remains relatively new to this phenomenon. 

The derivatives instruments have been used historically in all developed markets throughout the years as an effective hedging tool.

Loai Bafaqeeh, head of the securities division at Saudi National Bank

As the largest stock exchange in the MENA area, with a market capitalization of SR9.8 trillion ($2.61 trillion) as of the 2022 fiscal year, Tadawul “continues to identify opportunities more broadly to provide investors with diversified and attractive investment products,” Al-Athel said.

“With this in mind, we’ve also recently launched several indices to further build our offering to investors, including three size Indices – the Tadawul Small, Medium and Large Indices and the Tadawul IPO Index,” he added.

Embedded in the Kingdom’s Vision 2030 blueprint is the Financial Sector Development Program, a key initiative that supplements Saudi Exchange’s product offerings and complements developments to the financial market’s infrastructure.

The introduction of hedging tools by the market, such as index futures, served to attract more interest from sophisticated institutional foreign investors and help build institutional capabilities in Tadawul, according to Al-Athel.

The head of securities at SNB echoed this notion, with Bafaqeeh saying: “The derivatives instruments have been used historically in all developed markets throughout the years as an effective hedging tool, which is one of the main objectives of such instruments. Offering the derivatives instruments to all client
segments would be beneficial and help the Saudi market have greater depth, liquidity and potential trading volumes.”

Al-Athel pointed out that with options, “investors gain exposure to the price movement of the underlying stock, rather than a basket of stocks as with index contracts, but unlike equities, options don’t represent ownership in the underlying equities, nor do they give voting rights.”

He added: “You can utilize the financial leverage to boost profitability and gain that exposure at a relatively lower capital outlay where you only pay a fraction of the same notional value of stocks. Single stock options also enable investors to take advantage of both upside and downside market movements without owning the underlying stock as short selling is an embedded feature in options.”

Saudi Exchange launched the Derivatives Market in 2020, and has since introduced three derivatives products, including MT30 Index Futures, single stock futures, and now single stock options.

It said that it will launch physically settled US options, which are a type of financial contracts that require the actual delivery of the underlying asset that can be exercised at any time prior to expiration.

By adopting international standard practices, Saudi Exchange aims to continue on the trajectory of becoming a global market player and to strategically position itself to attract both international and domestic investment, Al-Athel said.

Source : ARABNEWS

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