Mastering Risks and Opportunities, Understanding Taiwan Index Options

        In the rapidly changing financial market, how to effectively grasp investment risks and improve asset returns is a compulsory course for modern investors. In addition to traditional stocks and funds, derivative financial products have gradually become an important part of investment portfolios. Among them, the "Taiwan Futures Index Options" (hereinafter referred to as "Taiwan Index Options") have become an indispensable tool for professional investors and institutional legal persons due to their leverage effect, high operational flexibility, and hedging function. This issue of 'Finance Column' introduces essential information about this tool to assist you in preparing for investment.

        1、 What is Taiwan Futures Index Options?

                Taiwan Index Options are options products based on the underlying asset of Taiwan Weighted Stock Index Futures (Taiwan Index Futures), launched by the Taiwan Futures Exchange. Simply put, it is a rights contract where the buyer, after paying a premium, has the option to buy (call) or sell (put) Taiwan Index futures at a specified price in the future, but is not obligated to execute it; And the seller has an obligation to perform when the buyer exercises its rights.

        The option belongs to "derivative financial products", and its price is influenced by factors such as the underlying index, volatility, remaining period, and interest rate. Due to its high leverage effect, whether used for hedging or speculation, the operational risk and return are relatively high, making it suitable for those with certain investment experience to participate.

        2、 The basic structure and transaction types of Taiwan Index's option

        The Taiwan Index adopts the "European style option" system for its selection rights, which can only be exercised on the expiration date. There are mainly two types:

        1. Call Option: The buyer has the right to buy Taiwan Index futures at the strike price on the maturity date; The seller has the obligation to perform the sale.

        2. Put Option: The buyer has the right to sell index futures at the strike price on the maturity date; The seller must fulfill the purchase obligation.

        3、 Trading characteristics and operational advantages

        1. Strong leverage effect: You only need to pay the premium to control the market position, and the return has a multiplier effect.

        2. High strategic flexibility: Investors can match different strike prices and rights directions, design strategies such as cross trades and price differentials, and flexibly respond to market changes.

        3. Comprehensive risk avoidance function: It can establish lower protection for spot positions, effectively reducing systemic risks.

        4. Rich variety of products and active trading: The types of Taiwan Index options include monthly and weekly options, as well as the "Friday expiration option" newly launched in June 2025, with daily trading volume ranking among the top in Asia and good liquidity.

        4、 Friday expiration option - new tool provides new flexibility

        In order to improve short-term trading and hedging efficiency, the Taiwan Futures Exchange will launch the "Taiwan Index Friday Maturity Option" from June 2025, becoming a new type of maturity option after the Wednesday weekly option, allowing investors to have more choices in a week. The product features are as follows:

        1. Expires every Friday: Enrich the selection of weekly trading days and enhance the flexibility of strategy deployment.

        2. Short term, high leverage, low premium: Suitable for short-term investors to coordinate with major events (such as central bank meetings, international data releases) for precise layout, as well as for planning short-term strategies or conducting "intraday trading" (operating within the same trading day).

        3. Rapid decline in time value: In option trading, as the expiration date approaches, the time value of the option will rapidly decrease, and the seller can use this to harvest the time value and accurately control the risk reward ratio.

        5、 Practical Strategy Application Example

        Fluctuating market expectations: Adopt a "cross option strategy" (simultaneously buying or selling buy and sell options with the same maturity date and underlying asset, but different strike prices), with a two-way layout.

        Stock hedging: When holding spot goods, buying put options can reduce the risk of decline.

        Direction oriented but limited increase: Use the "bull market spread strategy" to pursue limited profits and control costs.

        Short term operator: Combining Friday options, make short-term and efficient trading layouts.

        6、 Risk control and investment advice

        Although the Taiwan Stock Index has the opportunity to amplify returns, the risks cannot be ignored. Investors are advised to pay attention to the following points:

        1. Fund control: It should not exceed one's own risk tolerance, especially for naked selling options, which require rigorous risk assessment.

        2. Strategic discipline: Establish stop loss and stop profit points, and avoid emotional manipulation.

        3. Understanding the impact of volatility: Changes in volatility will significantly affect option prices, and investors should combine fundamental and technical analysis.

        7、 Conclusion

        The Taiwan Index's option is an advanced tool that combines flexible operation and risk management. Both professional legal entities and advanced retail investors can make good use of it, especially with the listing of the "Friday maturity option", which further enhances operational flexibility and provides more allocation choices for short-term and strategic traders. If you would like to further understand how to strengthen your investment portfolio through options or embark on a path of efficient trading, please open a futures account at Oriental Securities Corporation, where professional salespersons will assist you in market layout, seizing opportunities and risks.

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        *Image source: freepik

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