NZX tries to get options off ground

Geoff Brown says options are a feature of a mature market.

The stock exchange hopes it will be third-time lucky when it kicks off New Zealand's third attempt at establishing a market for share options tomorrow.

Five share options based on the biggest and most heavily traded stocks - Carter Holt Harvey, Contact Energy, Fletcher Building, Telecom and The Warehouse - will debut on the Sydney Futures Exchange.

NZX head of markets Geoff Brown said derivative products such as options and futures "are a feature of a mature market" and "present more opportunities for investors to make money from New Zealand equities".

Simply put, options give the purchaser the right to buy or sell a specified number of shares at a fixed price on or before a specified date.

The right to buy shares is a "call" option while the right to sell them is a "put" option. The seller of the option is obliged to either sell or buy the shares depending on the type.

The complexity of trading in options as well their inherent risk - especially for the inexperienced - puts them beyond the scope of most investors.

But NZX hopes local investors will follow the example of Australia, where the volume of trade in options has increased at a rate of 12.5 per cent per annum for the seven years.

In the United States, where options trading first began in 1973, the volume of options trading has "exploded", growing 20 per cent a year.

The chief investment officer of New Jersey-based Write Capital Management was in New Zealand last week talking to brokers and other investment professionals about option trading strategies.

Bud Haslett, who began trading options in the early 1980s, said many investors remained wary.

But investors with "reasonable expectation" and prepared to learn the nuances of trading strategies could use them to cushion the effects of share price falls and even enhance returns.

Brown said NZX would continue to work to establish a "broader understanding" of option trading strategies.

Two previous attempts to establish trade in options based on New Zealand equities in the 80s and mid-90s stalled, but Brown said there was now "a more general recognition of the significance of options".

The NZX was not expecting a great deal of initial activity in the new options products. "We would judge this on an 18-month to two-year time horizon."