China Net Finance, May 14, 2023 On May 15, 2023, ethylene glycol options and styrene options were listed on DCE, and DCE's chemical sector achieved full coverage of futures and options. Over the past year, the ethylene glycol options and styrene options markets have been running smoothly and orderly, the industry participation has increased steadily, and the option function has initially appeared, providing effective and flexible risk management tools for relevant petrochemical industry chain enterprises.
The option function works wellEthylene glycol and styrene are important chemical intermediate products, with a wide range of downstream applications, and ethylene glycol and styrene options have maintained a "steady start" since their listing, providing flexible and personalized hedging strategies and solutions for industrial chain enterprises.
From the perspective of market operation, as of the close of trading on May 14, 2024, ethylene glycol options and styrene options have been running for a total of 242 trading days. Among them, the cumulative trading volume, cumulative turnover and average daily position of ethylene glycol options were 13.211 million contracts, 5.41 billion yuan and 79,000 contracts respectively, accounting for 12.8% and 13.4% of the underlying futures, respectively. The cumulative trading volume, cumulative turnover and average daily open interest of styrene options were 34.584 million contracts, 8.75 billion yuan and 69,000 contracts respectively, accounting for 24.1% and 14.2% of the underlying futures, respectively.
From a volatility perspective, the implied volatility of the two options well reflects the market's volatility expectations for the futures market. Xie Yilun, an options analyst at the Orient Futures Derivatives Research Institute, said that the implied volatility level of near-month at-the-money options for styrene and ethylene glycol has been consistent with the historical volatility trend of the corresponding futures varieties over the past year. For example, the implied volatility of styrene options will reach a high point of the year in September 2023, reaching 32%, and the rest of the time will fluctuate within 15% to 30%, with the long-term historical average of implied volatility at 25%, while the long-term historical average of futures volatility is around 23%, and the operation of the options market has a strong linkage and correlation with the volatility of the corresponding futures varieties, and the option pricing efficiency is relatively high.
For the "answer sheet" of market operation submitted in the first year, relevant industrial enterprises have also given recognition. In the view of Yuan Ye, the head of options of Zhongji Petrochemical Co., Ltd., since the listing of styrene and ethylene glycol options, the market liquidity and function have been steadily improved, and the option pricing is reasonable, which can timely and accurately reflect the changes in the underlying market, providing an effective path for enterprises to understand market changes and carry out risk management.
Qian Cheng, senior business director of Jiayue Products Group Co., Ltd., also said that the styrene and ethylene glycol options market has shown a stable operation trend. The option price discovery mechanism is effective, can keenly reflect market expectations, and provides rich risk management and cost optimization strategies for the upstream, midstream and downstream of the industrial chain.
Industrial enterprises actively participatedIn recent years, under the influence of factors such as crude oil price fluctuations and a large number of chemical plants put into production, the price of domestic liquid chemical products fluctuates greatly, and in the face of an increasingly complex market environment, the risk control awareness of ethylene glycol and styrene industry chain enterprises has been continuously enhanced.
From the perspective of strategy, according to Yuan Ye, in terms of spot trade, entity enterprises can obtain a cost-effective hedging strategy through the relevant structure based on call rights; Through the related strategy of putting options, it is possible to increase the company's earnings while holding long positions. In terms of over-the-counter, the listing of on-exchange options can also provide an anchor for the pricing of over-the-counter products, which is of significant significance for stabilizing market quotations and increasing market liquidity.
In addition to single-leg hedging option strategies, companies can also develop a more flexible option strategy portfolio according to their own needs. "For example, you can build a neckline strategy, that is, buy put options and then sell call options appropriately to reduce the cost of option hedging." Xie Yilun said.
As a large-scale petrochemical trading enterprise in China, Zhongji Petrochemical has been involved in the futures market for a long time, and has gradually explored the use of styrene options to upgrade its risk management plan in the past year. "Since the listing of styrene options, we have built a 'three-neckline' option structure, which not only realizes the risk hedging effect, but also increases the income while holding long spot or futures positions through the put right." Yuan Ye told reporters that the listing of on-exchange options provides a new hedging tool for the industry, providing higher income space while ensuring safety.
Qian Cheng said that after the listing of styrene and ethylene glycol options, Jiayue Properties adjusted and optimized virtual inventory and physical inventory through the flexible use of futures and options, which not only realized the optimization of inventory management and reduced the cost of holding goods, but also served the personalized needs of downstream customers more accurately and reduced circulation costs.
Taking ethylene glycol options as an example, according to Qian Cheng, since the price of ethylene glycol has experienced a sharp decline in 2022, the absolute price has fluctuated at the bottom of the industrial valuation most of the time.
In the upstream of the industrial chain, the launch of relevant option tools also provides space for upstream enterprises such as Hengli to explore option hedging methods. "Hengli produces a wide range of chemicals, including styrene and ethylene glycol. In the traditional mode of using derivatives, the simple use of futures cannot fully meet the needs of enterprises. Zhang Ming, head of Hengli Hengyuan Supply Chain (Shanghai) Co., Ltd., said that after the listing of styrene and ethylene glycol options, Hengli embeds the nonlinear profit and loss of options into the trade contract, and provides customers with services such as guaranteed floor price sales and cap price procurement through rights trade, so as to better meet the needs of upstream and downstream enterprises.
"Through the application of styrene and ethylene glycol options, the procurement and sales methods have been further optimized, the risk of inventory depreciation has been transferred, and the actual sales revenue has not been reduced while the downstream procurement cost has been greatly reduced, which has achieved a win-win situation for both sides of the trade and effectively improved customer stickiness." Zhang Ming told reporters.
In the next step, DCE will continue to optimize and improve the rules of ethylene glycol and styrene option contracts based on the needs of the real industry, and carry out options training and promotion activities for industrial enterprises at different levels and categories, so as to further enhance the industrial participation in the options market, promote the stable and healthy development of the options market, and escort the steady operation of industrial enterprises.
(Editor in charge: Wang Qingyu)
