Tadawul trading screen
The Saudi Exchange (Tadawul) is preparing for the launch of single-stock options (SSOs) contracts, which will be traded as of Nov. 27. In the first phase, investors will be able to trade SSO contracts for these companies: Saudi Aramco, Al Rajhi Bank, stc and Saudi Basic Industries Corp. (SABIC).
SSO contracts are standardized contracts with a single stock as its underlying asset. It derives its value from the underlying asset (shares) and provides its holders with the right, but not the obligation, to sell or buy these assets at predetermined prices and by certain dates.
Such contracts provide many benefits to individual and institutional investors, enabling them to hedge against risks and limit potential losses under adverse market conditions, in addition to building effective trading strategies. They focus on shares of one company instead of shares of several companies, in contrast to index contracts, thus enhancing access to the Saudi capital market with less capital, while increasing profitability by benefitting from the financial leverage.
There are two types of SSO contracts:
Call Options: It gives the buyer the right, but not the obligation, to buy the underlying asset and obliges the seller to sell the underlying asset upon the buyer’s request, at a predetermined price and during the contract term.
Put Options: It gives buyers the right to sell the underlying asset without obligating them to do so. However, the seller is obligated to buy the underlying asset upon the buyer’s request, at a specific price and during the contract term.
The following table shows the basic characteristics of the SSO contracts product on Tadawul:
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Basic Characteristics of SSO Contracts on Tadawul |
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They are standardized contracts, and the underlying asset is single shares |
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Their values are derived from the value of the underlying asset (the stock) |
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Their trading process follows the US pattern, and are settled via the delivery of the underlying asset |
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They allow investors to hedge against potential risks. They also enable traders to explore the price movement of underlying stocks |
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They usually fluctuate with the movement of the underlying asset (stock) |
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They allow short selling without owning the underlying asset |
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Contract holders are not entitled to vote in the general assemblies of listed companies |
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Contract holders are not entitled to receive dividends from companies |
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Margin requirements apply to sellers only |
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They can be traded on a trading platform by opening an account with a member of the Saudi Derivatives Market |
Both stocks and SSO contracts are traded on Tadawul, both allowing for exploring the movement of underlying stock prices.
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Difference Between Stock Trading & SSO Contracts |
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Stock trading |
SSO contracts |
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Owning shares represents ownership in the company in question |
Owning them does not represent ownership in the company in question. Therefore, the contract holder is not entitled to vote in the general assembly or receive dividends from the company |
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Maturity is permanent - there is no expiration date |
Maturity is limited – the contract has an expiration date |
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Investors must pay 100% of the stock price to own it |
Investors can purchase contracts by paying a deposit, which often represents a small portion of the total value |
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Investors must own shares before selling them, except in the case of short selling |
Traders can take advantage of falling prices by buying put options contracts or selling call options contracts |
Exchange-traded derivative products involve risks similar to other financial market products. SSO contracts may expose trading parties to certain risks, including market volatility and market liquidity.
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