Stock Options

WHAT IS A STOCK OPTION?

A stock option is a financial contract based on single underlying stock which is traded on the Stock Exchange and cleared through its Clearing House. There are two types of options:

CALL
A call option buyer has the right to buy the underlying stock at the strike price (i.e. pre-determined price) on or before the expiry day, while a call option seller has the obligation to sell the underlying stock at the strike price upon exercise on or before the expiry day.

PUT
A put option buyer has the right to sell the underlying stock at the strike price on or before the expiry day, while a put option seller has the obligation to buy the underlying stock at the strike price upon exercise on or before the expiry day.

OPTION PREMIUM
The cost of an option is option premium, which is quoted on a per share basis. The buyer of a stock option pays the option premium, while the seller receives the option premium (margin requirements apply to stock option sellers).

INVESTMENT RETURN
The return of a stock option position depends on the price of the underlying stock. A diagram illustrating the profit / loss profile of a stock option position at expiration in relation to the underlying stock price is called an option expiration payoff diagram. The expiration payoff diagrams of four basic option positions are as follows:

Long Call
Profit

Long Put
Profit

0
Loss

Stock Price
Premium paid

0
Loss

Stock Price Strike Price

Premium paid

Strike Price

Hong Kong Exchanges and Clearing Limited 12/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong 12 Tel : +852 2522 1122 Fax : +852 2295 3106 Website: www.hkex.com.hk E-mail: info@hkex.com.hk March 2011 20113

A call option buyer is subject to potential profit on the upside and potential loss is limited to the call premium.

A put option buyer is subject to potential profit on the downside and the potential loss is limited to the put premium.

Short Call
Profit

Short Put
Profit

Strike Price
Premium received

Strike Price

0
Loss

Stock Price

0
Loss

Premium received

Stock Price

A call option seller is subject to potential profit limited to the call premium and a potential loss on the upside.

A put option seller is subject to potential profit limited to the put premium and a potential loss on the downside.

USES OF STOCK OPTIONS

Stock options can assist investors in meeting different investment objectives, including: Leveraged trading on the upside or downside, e.g. long call or long put Transaction cost reduction, e.g. long call as a trading substitute for its underlying stock Hedging market risk, e.g. long put for protection on the downside Yield enhancement, e.g. short call to receive the premium Lock-in a stock profit, e.g. long put to protect the floating profit Setting a stock purchase price, e.g. short put to target stock purchase at the strike price Meeting trading needs in bullish, bearish, stagnant or volatile markets, e.g. options combination trades

CONTRACT SUMMARY OF STOCK OPTIONS

Option Types Contract Size (in terms of shares) Contracted Value Contract Months Minimum Fluctuation Option Premium Strike Prices (HK$) Puts and calls Refer to the stock option class list Option Premium multiplied by the Contract Size Spot, the next two calendar months & the three quarter months# # HK$0.01 Quoted in HK dollars on a per share basis $0.01 Up to $2 $2 to $5 $5 to $10 $10 to $20 $20 to $50 $50 to $100 $100 to $200 $200 to $300 $300 to $500 9:30 a.m. 12:00 p.m. and 1:30 p.m. 4:00 p.m. 93012 1304 Business day immediately preceding the last business day of the contract month Options can be exercised at any time up to 6:45 p.m. on any business day up to and including the last trading day 645 HK$2.00 Physical delivery of underlying shares on exercise and settlement periods are: T + 1 (options premium, payable in full); or T + 2 (stock transfer following exercise) T+1 T+2 Tier 1 HK$3.00 Negotiable Tier 2 HK$1.00 $0.05 $0.10 $0.25 $0.50 $1.00 $2.50 $2.50 $5.00 $10.00

Trading Hours (Hong Kong time) Expiry Day Exercise Style (American) Exercise Fee Settlement

Trading Tariff (Combined trading and clearing fee) Brokerage Commission

# #

The Exchange may introduce any other longer-dated expiry month in selected stock option classes as it deems necessary.

STOCK OPTION CLASS LIST *

*
a) Stock Option Classes with Contract Size More Than One Underlying Board Lot Shares

SEHK Code
1288 1299 2601 2823 2827

Underlying Stock Name

HKATS Code HKATS

ABC AIA CPI A50 CS3

Contract Size (shares) ()

10,000 1,000 1,000 5,000 1,000

Number of Board Lots

10 5 5 50 5

Tier No.
1 2 1 1 1

Agricultural Bank of China Limited AIA Group Limited China Pacific Insurance (Group) Co., Ltd. () iShares FTSE A50 China Index ETF* iShares A50ETF * * (* This is a synthetic ETF) W.I.S.E. - CSI 300 China Tracker * 300* (* This is a synthetic ETF) (*

b) Stock Option Classes with Contract Size Equal to One Underlying Board Lot Shares

SEHK Code Underlying Stock Name

1 2 3 4 5 6 11 12 13 16 17 19 23 66 267 293 330 358 386 388 390 494 688 700 728 762 857 883 902 939 941 998 1088 1171 1186 1211 1398 1800 1898 1919 2038 2318 2328 2388 2600 2628 2777 2800 2899 3328 3968 3988 * * Cheung Kong (Holdings) Ltd. CLP Holdings Ltd. The Hong Kong and China Gas Co. Ltd. The Wharf (Holdings) Ltd. HSBC Holdings Plc. Power Assets Holdings Ltd. Hang Seng Bank Ltd. Henderson Land Development Co. Ltd. Hutchison Whampoa Ltd. Sun Hung Kai Properties Ltd. New World Development Co. Ltd. Swire Pacific Ltd. A The Bank of East Asia, Ltd. MTR Corporation Ltd. CITIC Pacific Ltd. Cathay Pacific Airways Ltd. Esprit Holdings Ltd. Jiangxi Copper Company Ltd. China Petroleum & Chemical Corporation (Sinopec) Hong Kong Exchanges and Clearing Ltd. China Railway Group Ltd. Li & Fung Ltd. China Overseas Land & Investment Ltd. Tencent Holdings Ltd. China Telecom Corporation Ltd. China Unicom (Hong Kong) Ltd. PetroChina Co. Ltd. CNOOC Ltd. Huaneng Power International, Inc. China Construction Bank Corporation China Mobile Ltd. China CITIC Bank Corporation Ltd. China Shenhua Energy Company Ltd. Yanzhou Coal Mining Company Ltd. China Railway Construction Corporation Ltd. BYD Company Ltd. Industrial and Commercial Bank of China Ltd. China Communications Construction Company Ltd. China Coal Energy Company Ltd. China COSCO Holdings Company Ltd. Foxconn International Holdings Ltd. Ping An Insurance (Group) Co. of China, Ltd. PICC Property and Casualty Company Ltd. BOC Hong Kong (Holdings) Ltd. Aluminum Corporation of China Ltd. (Chalco) China Life Insurance Company Ltd. Guangzhou R&F Properties Co., Ltd. Tracker Fund of Hong Kong Zijin Mining Group Company Ltd. Bank of Communications Co., Ltd. China Merchants Bank Co., Ltd. Bank of China Ltd.

HKATS Code HKATS

CKH CLP HKG WHL HKB HEH HSB HLD HWL SHK NWD SWA BEA MTR CIT CPA ESP JXC CPC HEX CRG LIF COL TCH CTC CHU PEC CNC HNP CCB CHT CTB CSE YZC CRC BYD ICB CCC CCE CCS FIH PAI PIC BOC ALC CLI RFP TRF ZJM BCM CMB BCL

Contract Size (shares)

1,000 500 1,000 1,000 400 500 100 1,000 1,000 1,000 1,000 500 200 500 1,000 1,000 100 1,000 2,000 100 1,000 2,000 2,000 100 2,000 2,000 2,000 1,000 2,000 1,000 500 1,000 500 2,000 500 500 1,000 1,000 1,000 500 1,000 500 2,000 500 2,000 1,000 400 500 2,000 1,000 500 1,000

Tier No.
1 1 2 1 1 2 2 1 1 1 1 1 2 2 1 1 2 2 2 1 2 1 1 2 2 2 2 2 2 2 1 2 2 1 2 1 2 2 2 2 1 2 2 2 2 2 2 2 2 2 2 2

The most updated stock options contract specifications, stock options classes and board lot sizes are set forth at www.hkex.com.hk.
www.hkex.com.hk

LIST OF INFORMATION VENDORS AND ACCESS CODES

Information Vendor Access Codes AAStocks.com Ltd 6 digits code starting with 340 340 ACTIV Financial Systems, Inc. AFE Solutions Limited HKATS Trading Code HKATS 7 + 5 digits SEHK Code + Contract Month (1 = spot month, 2 = 2nd month, 3 = 3rd month and etc.) e.g. 7000011 Cheung Hong Stock Options (spot month) 7 + + 1 = 2 = 3 = 4 = 5 = - 7000011 Stock code HK Equity OMON <GO>, e.g. 5 HK Equity OMON <GO> (for Options on HSBC) HK Equity OMON <GO>e.g. 5 HK Equity OMON <GO> Hit option on menu bar, select Stock Options Quotation and then select the underlying option Stock Options Quotation Finet FME/FIE/FFE: Select "Options" button Finet PowerStation: "Derivatives" "HK Options" Access Code in the Options Panel FME/FIE/FFE: "Options""Futures & Options" "HK Options Market""Option Panel" HKATS Trading Code HKATS 0#stock code*.HK, e.g. 0#0005*.HK (for Options on HSBC) 0#*.HKe.g. 0#0005*.HK <Class code> <y><m><c/p><strike>,278 e.g. HKB59C125,278 (for options on HSBC/) (Class code=HKATS code, y=year, m=month, c=Call, p=Put, strike=strike Price) Class code=HKATS y=m=c=p=strike= HKATS Trading Code + "0" [Month][Year] HKATS + "0" [][] Alt+O -> <stock code> Alt+O -> <> <Class code> <y><m><strike> Class code=HKATSy=m=strike=

Bloomberg L.P. ET Net Limited Finet Holdings Limited

Infocast Limited Reuters Ltd, a Thomson Reuters Company Six Telekurs Ltd

Telequote Date Int'l Ltd. Tele-Trend Ltd Tenfore Systems Ltd

For the most updated information, please visit: http://www.hkex.com.hk/eng/market/dv_tradfinfo/infovendor.htm http://www.hkex.com.hk/eng/market/dv_tradfinfo/infovendor.htm

TERMINOLOGY

Intrinsic Value Intrinsic value is the amount received when the option is exercised. This is measured by the difference between the strike price of an option and the market price of the underlying stock. If the difference is positive, it has positive intrinsic value; otherwise the intrinsic value is zero. Time Value Time value is the extra amount of value apart from the intrinsic value in the option premium; it is determined by six factors: underlying stock price, strike price, volatility, time to expiration, interest rates and dividends. At-The-Money (ATM) The strike price of call or put is equal to or close to the underlying stock price. In-The-Money (ITM) The state when the strike price of a call option is lower than the underlying stock price or the strike price of a put option is higher than the underlying stock price. Out-Of-The-Money (OTM) The state when the strike price of a call option is higher than the underlying stock price, the strike price of a put option is lower than the underlying stock price. Volatility (%) Volatility represents the annualized standard deviation of the return of the underlying stock. It reflects the degree to which % the price of a stock tends to fluctuate over a specified period of time. The higher the volatility, the higher the option premium.
Risks of Trading Options
Options involve a high degree of risk. Losses from options trading can exceed your initial margin funds and you may be required to pay additional margin funds on short notice. Failure to do so may result in your position being liquidated and you being liable for any resulting deficit. You must therefore understand the risks of trading in options and should assess whether they are right for you. You are encouraged to consult a broker or financial adviser on your suitability for options trading in light of your financial position and investment objectives before trading.

Hong Kong Exchanges and Clearing Limited (HKEx)

All rights reserved. Nothing herein is to be construed as a recommendation to purchase or sell options contracts or to provide investment advice. While efforts are made to ensure the accuracy of information contained in this publication, HKEx and its subsidiaries do not warrant its accuracy, timeliness, completeness or fitness for a particular purpose and do not assume any liability for any errors or omissions or any action taken on the basis of such information.