Market Watch
Options Rules & Regulations

Rules and Regulations for trading Forsa Options at the Kuwait Stock Exchange

 

  1. Trading in secondary options market will be on stocks listed in the KSE according to the procedures and rules mentioned below and any other rules and regulations issued by the KSE
  2. Registration and subscription fees for the market maker in the option market will be as follows

                       I.      Annual subscription fees             :           KD. 2,000/-

                      II.      Subscription and listing fees       :           KD. 10,000/-

                    III.      Bank guarantee                         :           KD. 250,000/-

  1. The KSE will be the sole regulator for options trading. Furthermore, the KSE will be the sole and ultimate authority for any case of arbitration among the market participants (option writer/market maker and option buyers/Investors)
  2. The KCC will be the sole settlement agent for the options market with responsibilities including settlement, clearing and maintaining the margin system
  3. The KSE reserves its right to amend any of the regulations stated in this text and it also reserves its right to add further regulations should the need arise


Writing stock options at the secondary options market

  1. Options will be written on stocks that satisfy certain criteria regarding market capitalization, liquidity and volatility of the stock itself
  2. The option writer will only issue options on stocks that have been previously approved by KSE
  3. The secondary options market trades in American-style options, which give its holder the right to exercise the option at any time between the date of purchase and the expiration date
  4. KSE shall specify the terms of the option contracts that best serve the market interests
  5. Option contracts shall have a minimum term of 1 month and a maximum term of 12 months with March, June, September and December as the fixed expiration months. All option contracts shall expire at close of trading of KSE OTC market on the last Wednesday of the expiration month as shown below

 

Option cycles

Option Cycle

Expiration Date

One-month cycle

Expires on the last Wednesday in the month

Three-months cycle

Expires on the last Wednesday in March

Expires on the last Wednesday in June

Expires on the last Wednesday in September

Expires on the last Wednesday in December

Six-months cycle

Expires on the last Wednesday in June

Expires on the last Wednesday in December

Nine-months cycle

Expires on the last Wednesday in September

Twelve-months cycle

Expires on the last Wednesday in December

 

  1. Options will be written on a series of three strikes, whereby the first one will be “at-the-money” and the remaining two will be “out-of-the-money”. The difference between any of them will be two price units as shown in the example below

            Cash or spot price                                  :           1200 Fils

Price unit or tick                                     :           20 Fils

First strike price (at-the-money)              :           1200 Fils

Second strike price (out-of-the-money)    :           1240 Fils

Third strike price (out-of-the-money)       :           1280 Fils

  1. The market maker shall prepare a daily bid-ask price of the option contracts which will be traded in the market
  2. The market maker shall quote prices on all open contracts
  3. The market maker shall, with the approval of the KSE, write additional series of options in specific circumstances

 

Collateral Requirements for trading Options 

  1. The market maker, with the approval of the KSE, prior to writing a new series of options, shall deposit the following collateral with the KCC   

 I.        Physical collateral: Consisting of 100% of the underlying stocks. 

 II.        Cash collateral: During the option trading process, the option writer shall maintain cash collateral equal to 8% of the underlying stock on which options are issued. The cash collateral shall be computed on the date the options are issued. At the close of the trading day, KCC monitors and compares the gross value of the options written with the cash collateral of the option writer and settles the difference. If the value of the sold options exceeded the cash collateral, the option writer shall be required to balance the difference. If the value of the sold options was less than the cash collateral, the difference will be moved automatically to the account of the option writer 

  1. KCC keeps in its custody the collateral of the option writer and it will be responsible for computing, monitoring and calling for additional collateral if required
  2. The option writer shall deposit all the cash collaterals with KCC no later than 11 am of the next day after trading of options (Trade date + 1). If the T+1 date is a holiday, the deposit shall be made no later than 11 am of the next working day
  3. The option writer will deposit all collateral with the KCC prior to writing any options
  4. While settling option contracts

      I.        Call option: the holder of the option contract shall pay the gross value of the contract to KCC (number of the underlying stock * strike price) as a requisite to take ownership of the stocks

    II.        Put option: the holder of the option contract shall deliver the underlying stocks to KCC as a requisite to receive the gross value of the contract

    Thus, the option contract is closed and will be removed from the register of the market maker and the clearing company

  5. After the expiration of the option contracts, the collateral relating to the expired contracts will be returned to option writer unless new series of options are written on the same underlying stocks

 

The Options trading mechanism

  1. Trading in option contracts will be after the formal trading hours (12.55 PM to 1.15 PM - Kuwait Time) of the cash market and the scope of trading will be extended at a later stage to be during the formal trading hours at the market. The KSE management shall act accordingly to modify the secondary options trading system to Exchange traded options
  2. Only those option contracts written by the authorized market maker are allowed to be traded. No other option contracts may be traded
  3. The market maker shall display through the broker terminals and display screens, the options’ details during the daily option trading session. The information shall include the following

                             I.        Type of option

                            II.        Name of the option (ISIN) and the underlying stock (Ticker)

                          III.        Available quantities

                           IV.        Strike prices

                            V.        Contract’s expiration dates

                           VI.        Bid and ask price for each option contract

                         VII.        Settlement price (used in pricing the option)

  1. Buying (selling) option contracts from (to) the market maker is only done through the KSE authorized brokers. The market maker is not allowed to directly trade with clients
  2. The market maker shall be treated as a regular investor when buying an option contract issued by another option writer; accordingly the market maker will be subject to all the laws and by-laws applicable to regular option holders
  3. Option contracts shall be offered only by KSE authorized option writers
  4. The option writer has the right to reissue option contracts once purchased prior to their expiration date
  5. The option writer has the right to continue issuing option contracts within the same expiration period as those initially approved by KSE
  6. The market maker has the obligation to buy back contracts at the quoted Bid price, and to sell contracts if available on its books, at the quoted Ask price
  7. The option holder shall not have the right to buy an option contract and sell it or exercise it within the same trading day
  8. The broker shall be fully liable towards the option writer/market maker for the premium in case the investor fails to pay it


Option contract prices

  1. The market maker shall price the issued options on a daily basis using a pricing model that has been previously agreed upon with the KSE
  2. The market maker will quote (at his discretion) daily prices for the option contracts appropriate to market conditions and the specific condition of the underlying stock. However the KSE has the right to intervene in pricing the option contract, and in the margin/spread between the bid price and ask price if it sees it is necessary and in agreement with the markets interest
  3. Under normal market conditions, the market maker shall consider the spot price of to be equal to “Weighted Average Trading Price”.  The spot price shall be computed at the close of the spot market, and shall be calculated by dividing the sum of the value of each trade over the total volume of trades of the underlying stock during the day

The table below illustrates the calculation of the Weighted Average Trading Price

 

Day Trades

Price (Fils)

Volume

Price  Volume

*VWAP for the day volume (Fils)

First trade

850

1,500,000

1,275,000

 

Second trade

855

3,000,000

2,565,000

 

Third trade

860

7,000,000

6,020,000

 

Fourth trade

870

15,000,000

13,050,000

 

Total

 

26,500,000

22,910,000

=22,910,000/26,500

= 0.8645

*VWAP: volume weighted average price

 

  1. In order to enable the market maker to have the required liquidity, he has the right to follow another model to quote the price of stock price used in determining the price of the option following unusual trading conditions and as mentioned below

I.          The limit up movement of the stock price:  In this case the market maker has the right to right to price the option using an underlying spot price equal or less than the limit-up price plus five pricing units (which is equal to the limit-up-price for the following day)

II.         
The limit down movement of the stock price: In this case the market maker has the right to price the option using an underlying price equal or higher than the limit-down price at the day minus five pricing units (a one day limit down)

III.           Non-tradability of the underlying stock: If there is no trading on the underlying stock, the market maker shall have the right to price the option using an underlying price within the a range between (a) the last close price minus five pricing units (a one day limit down) and (b) the last close price plus five pricing units (a one day limit up).

IV.          Suspended trading of the underlying stock: If the KSE decided to freeze or stop the trading of the underlying stock, the market maker shall have the right to suspend the trading of all related option contracts; however, the option holder shall reserve the right to physically exercise the contract

  1.  In normal market conditions, the price of the option contract shall be valued at equal to or higher than the intrinsic value of the option.  The intrinsic value shall be equal to the difference between spot price (as defined in 3 and 4) and the strike price
  2. The implied volatility utilized in pricing the options shall be determined by the option writer, and shall be based on the writer’s estimate of the volatility expected by the market
  3. The interest rate used for pricing the options shall range between the CBK discount rate plus 2% and the CBK discount rate plus 7%



Option contracts settlement

  1. The market maker shall have the obligation to buy back all the options issued at the Bid Price
  2. The option holder has the right to exercise the option contracts against the physical delivery of the shares only after depositing the contract value (strike price multiplied by the number of shares) with the KCC
  3. The settlement cycle will be determined by KCC


Expiration of option contracts

  1. The contract will expire at the close of the KSE trading day as per the terms of the contract
  2. On the expiration date and provided the option contracts are in the money, all outstanding contracts shall be automatically settled in cash at the Bid Price quoted by the market maker. The Bid Price shall be paid no later than 11 am on the business day following the expiration date of the contract.  However, if the option contract is out-of-the-money, the contract will be closed without any liability against the option writer
  3. Under no circumstances shall the expiration date of the option contracts be modified
  4. At expiry, the value of the option contract shall not be less than the intrinsic value of the option which is equal to the difference between spot price and the strike price


Size of the option contracts

  1. The minimum size of each option contract is 1000 (one thousand stocks) and the maximum size is 100,000 (one hundred thousand stocks). The contract size will be in multiples of 1000. The maximum limit a client can buy in the same day and for the same underlying stock for the same expiration day is 300,000 (three hundreds thousands) stocks only.


Corporate Actions

  1. To minimize the effect of corporate actions on the value of the contract and to preserve the economic rights of the option holder, the option contract shall be amended automatically as per the following

 I.       Cash Dividends: the strike price is revised.

II.      Bonus shares: the strike price is revised

III.    Stock Split: the strike price is revised

IV.    Capital Increase:  the strike price is revised

V.      Capital Decrease:  the strike price is revised

VI.    Mergers & Acquisitions:  the market maker shall suspend the trading of all option contracts related to the stock while maintaining the right of the option buyer to physically exercise his contract

  1. Other corporate actions requiring adjustments to the option contracts shall be determined when deemed necessary by the KSE
  2.  The cash dividends and bonus shares are distributed to the stocks holder and not to the option holder. Such rights shall be transferred to the option holder only if and when the option is exercised
  3. The option writer shall maintain the voting right of the underlying share. Such rights shall be transferred to the option holder only if and when the option is exercised


Broker’s commission

  1. The option contracts are subject to the commission percentages set by the market management. Besides exercise of the contract, Forsa allows the investor to sell the option contract to the market maker. In case of exercise, the underlying stocks will be moved to the ownership of the option holder after he pays the contract value. In case of selling, the option holder sells his option contract to the market maker. Therefore, the commission of the broker is likely to be different for exercise of the underlying stocks or selling the option. The brokerage commission is as follows

 I.         While buying the option, the option buyer and the market maker each pay a commission of 1.25% on the premium value of the contract (Ask price * number of stocks) plus One KD. One (KD. 1/-)

II.        While selling the option to the market maker, the option buyer and the market maker each pay a commission of 1.25% on the premium value of the contract (Bid price * number of stocks) plus KD. One (KD. 1/-)

III.        For physical exercise of the option contracts, the option buyer and the option writer each pay a commission of 0.125% on the total contract value (strike price * number of stocks)

IV.       At expiry of the option contract, if there is any value due to the option buyer, the market maker/the option writer may transfer this amount to the account of the option buyer at the clearing company without paying any commission


Options Table of Contents
Options Market

Daily Trades

Pricing List

Market Watch



Options Literature

Option Market Overview

What are Options?

Valuation of Options

The Greeks

Trading Forsa Options

Listed Stocks in the Options Market

Option Trading at KSE

Forsa Option Contract Specifications

Rules and Regulations

Brochures


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