Hisse senedi opsiyonları ve İstanbul Menkul Kıymetler Borsası`nda uygulanabilirliği

Abstract

Trading in financial futures and options has come to play such an important role in theIinancialmarkets tbat it is surprising to recall tbat these markets arc less tban 15 yearsold.The objective or this study is to sketch the role of stock options in the overall financialmarketsystern and to describe the interaction between the option market and those furthe underlying securities as well as to discuss the applicability of stock options in theIstallhlll Stock 1':xch:1I1gC (lSI':) Ikriv:llives fvimkd tlHlt will he lallnched hy the elld orthe year 1997. The approach offered here will try to shed light on any change in themarket when stock options starts trading in the capital market. ror this purpose, asingle stock which is currently under privatization and h~lS the highest trading volumein the lSE Securities Market is selected The study in summary covers the followingtopics:• The development and structure of opliQns markets is covered in general terms,• The basic concepts, theory and pricing of stock options is discllssed in detail,• The options pricing models und tlwir historical development is presented,• The advantages und disadvantages of option pricing models, specillcally binomialand B1ack-Scholes models, and the modifications that may Icad to considerableimprovement in pricing is discussed,• The sensitivity analysis of option premium to vanoLls factors that lead to the,formation of an option price is analyzed,• The applicability of stock options in the Turkish Capital Markets in the absence ofDerivalives Market is investigated 011 a selected single stock,• The stock volatilily of ISE Securities Market ancl ils term structure is covered andits polential impact on stock option initiation is discussed,• The polential economic and financial impact or stock option 111 Turkey ISevaJ uatecl.To begin with, options are financial instruments that can provide the individual and/orinstitutional investor, with tbe flexibility that he needs in almost any investmentsi tuation he may encounter.Optiolls give tile illvestors optiolls. 'I'11<:y ,Ire Il(lt just limited to buyillg, selling orstaying out of the market. With options, the investors can tailor their position to theirown situation and stock market outlook. The potential benefits of options may besummarized as follows:• The investor can protect stock holdings from a decline in market price• The investor can increase income against current stock holdings• The investor can prepare to buy stock at a lower price• The investor can position himself for a big market move - even when he cloes notknow which way prices will move• The investor can benefit from a stock price's rise or fall without incurring the costof buying or selling the sLock outright.A stock option is a contract which conveys to its holder the right, but not theobligation, to buy or sell shares of the underlying security at a specified price on orbefore a given date. After this given elate, the option ceases to exist. The seller of anoption is, in turn, obligated to sell (or buy) the shares Lo (or from) the buyer of theoption at the specified price upon the buyer's request.Although the history of options extends several centuries, it was not until 1973 thatstandardized, exchange listed and government-regulated options became available. Atthat time, a revolutionary change occurred in the options world. Thc Chicago Board ofTrade (CBOT), the ,,,,orId's oldest and largest exchange for the trading of commodity{'uturcs contracls, organized an exchange exclusively {'or trading options on stocks.The Exchange was named the Chicago Board Options Exchange (CBOE). It openedits doors for call option trading 011 April 26, 1973 and the first puts were added in.Iunc 1977.Tbe CI30E created a central market place [or options. By standardizinlj the terms andconditions of option contracts, including listing requirements, contract size, exerciseprices, expiration dates, position ancI exercise limits, it added liquidity. Mostimportantly, however, the CBOE added a clearing house that guaranteed to the buyerthat the writer would fulfill his or her end of the contract. Thus, unlike in the over-thecountermarket, option buyers no longer had to worry about the credit risk of thewriter. This made options more attractive to the general public.Since that time, several stock exchanges have begun trading stock options. TheseCXc/HlllgCS scck to provide competitive, liquid alld orderly markets for the purchascand sale of standardized options. All option contracts traded on these exchanges areguaranteed by the clearing house systcm. In only a few years, these options virtuallydisplaced the limited trading in over-the-counter options and became an incUspen~abletool for the securities industry.There are several issues that one should grasp with stock options. One of the basicissue that one should. refer to while analyzing stock options is the basic principles ofoption pricing. It identifies rules that impose upper ancl lower limits on put and callprices and examines the variables that affect an option's price. In addition, itdcmonstrates how put and call prices are relatcd to each other by the put-call parityrule. Finally, it examines the conditions that can induce an option trader to exercise anoption prior to expiration.In case of the basic principles of option pricing, an often confusing principle is theestablishmcnt of a minimum price. first, the absolute minimum price of a call is zero.For American calls, the intrinsic value will provide a higher minimum if the option isin the money. Thus, it dominates the minimum of zero. However, it cloes not apply toEuropean calls, because they can not be exercised early. Nonetheless, there is a lowerbound for European calls, which is the maximum of zero or the stock price minus thepresent value of the exercise price. This is at least as high as the intrinsic value of theAmerican call. I3ecause American calls must be worth at least as much as Europeancalls, this lower bound applics to American calls as well. Thus, the ultil~1ale minimum3for both European and American calls (on non-dividend-paying stocks) is the lowerbound established for European calls.Both American and European puts have an absolute l1Ull1mum value of zero.American puts have an intrinsic valuc, which is thc maximum of zero or the exerciseprice minus the slock price. The minimum does not apply to European puts, becausethey can not be exercised early. European puts have a lower bound that is themaximum of zero or the present value of the exercise price minus the stock price.Because this lower bound is never greater than the intrinsic value of the American put,it does not help the investor raise the minimum for American puts. Thus, the lowerbound is the minimum for European puts and the intrinsic value is the minimum forAmerican puts (011 non-dividend-paying stocks).Although put-call parity appears to be a method of pricing options, it is only a relativeoption pricing model. To price the put, one needs to lmow the call's price; to price thecall, one must know,the put's price. Therefore, one can not use put-call parity to priceonc instrument without either accepting the market price of the other as correct orhaving a modcl that first gives us the price of the other.In short, one needs an option pricing model- a formula that gives the option's price asa function of the variables that should affect it. If the option pricing model is correct,it should give option prices that conform to these boundary conditions. Mostimportant, it should establish the theoretically correct option price. If the market priceis out of line with the model price, arbitrage should force it to move toward the modelpnce.Beneath the surface of option pricing model is many years of research that evolvedfrom an understanding of the mathematics and physics. While the Black-Scholesoption pricing formula is the most popularly known and accepted one in the literature,there are several models developed prior to this model, including Sprenkle (1964),Boness (1964) and Samuelson (1965) Model.4Since these models had some deficiencies in their respective assumptions, newmodels had been enhanced to avoid these errors and improve the existing models to aconsiderable extent. Two well known of these models are the binomial option pricingmodel and Black-Scholes option pricing model.The binomial option-pricing model, which was originally developed by Cox, Ross andRubinstein in 1979, assumes that the stock price follows a multiplicative binomialprocess over discrete periods. Starting with the simple one-period binomial optionpricing model, the value of the stock underlying an option (S) is assumed to go up (u)or clown (d) by a specific amount in the next period. In other words, the stock will takeon a value in the next period of either uS or dS, where u > 1 and 0 < d <1. As the oneperiod case is unrealistic, the model is then extended to a two-period model and thetwo-period model to multi-period model which is mueh more realistic.The binomial option pricing formula can be npplied to various time periods: months,weeks, days or even minutes. As the time period used becomes smaller, the number ofperiods to expiration increases for an option with a given time to expiration. Thus,c011tinuos-time option pricing formula, such as the Black-Scholes model are notingmore than the binomial formula for an infinite number of arbitrarily small timeperiods.In fact, the binomial model provides a foundation for the Black-Scholes model whichwere developed by Fisher Black and Myron Scholes in 1973. In addition, the binomialmodel can be extended to converge to the Black-Scholes Model and it can provideAmerican option prices as well.The Black-Scholes Model, on the other hand, is a practical method for obtaining thetheoretical fair value for a call option. The study reviewed the effects of changing thevarious inputs on the option premium and observed the difficulty of obtaining certaininputs, such as the volatility of the underlying stock. The volatility is the most criticalite111 because it must be estimated and the model is highly sensitive to the volatility.By using put-eaU parity, the Black-Scholes Model can also be applied to,Europeanputs.5Actually, there are several factors which contribute value to an option contract andthereby influence the premium or price at which it is traded in Black-Scholes OptionPricing ModeL The most important of these factors arc the price of thc underlyingstock, time remaining until expiration, interest rates, the volatility of the underlyingstock price and cash dividends. The relevant parameters that measure the sensitivity ofoption premium to each of these factors, except cash dividends, are called delta,gamma, theta, rho and vega respectively.As to the benefits of stock options trading, as Fisher Black (1975) suggests,information traders may prefer trading in. options rather than shares due to economicincentives provided by reduced transaction costs, capital requirements, and tradingrestrictions aed due to the greater action offered by option trading.In fact, futures and options markets contribute to increased demand in the underlyingcash markets. Supporters point to benefits resulting from the fact that financial futuresand options greatly expand the range of strategies for risk management available toinvestors. But others express concern that trading in these instruments may interferewith the smooth operation of existing financial markets.The analogy of the options market as a kind of barometer of market sentiment isappropriate. When stock options prices begin to drop, leading to arbitrage activity thatpushes down stock prices. in the cash market, one should view this as the normalresponse of a unified financial market to'changing expectations: prices first move inthe most liquid segments of the market and over time spread to the less liquidsegments as investors gradually readjust their portfolios.Because of their more-complex payoff patterns, options create a wider variety ofportfolio optimization strategies. Options are also subject to an arbitrage-basedtheoretical valuation relationship, the Blaek-Scholes model or some variant of it, butbecause the model involves the volatility of the underlying asset that is not directlyobservable, deviations from theoretical pricing in the. options market are moreambiguous than in the futures.GOption introduction may have significaHt effects on the returns of the underlyingsecurity, as documented by a large number of studies on, primarily, U.S. stockmarkets. These effects are related to risk and return characteristics, to marketmicrostructure, and to price adjustments to new information. Overall, option listingseems to have no impact on the systematic risk and a dampening effect on the totalrisk of the underlying stock. Furthermore, bid-ask spreads typically declinesubstantially, while the speed with which new information is incorporated into stockprices tends to increase. On the other hand, no firm conclusions can be drawnregarding the implications for stock excess returns and trading volume.Coming to the Turkish Capital Markets, the latter have shown a remarkable progressin the last decade in terms of both quality and quantity and have become /110reinternationalized by offering new markets and financial instruments to the investors.Within a very short period of time, a ti-ansparent, well-administered and carefullysupervised capital market structure has been built in Turkey. In spite of all theseefforts, Turkish financial system is characterized by its high volatility, since themarket can not be isolated from the whole economy.The Istanbul Stock Exchange (ISE), being the only securities exchange of Turkey,strives to further increase its share within the Turkish economy and is now about tolaunch a new market, namely `Futures and Options Market` so as to provide newhedging tools to the investors by offering a variety of markets and instruments. Istrongly beli~ve that this market will provide very important hedging tools forinstitutional investors, and t.hus will make Turkish markets more attractive and morechallenging for especially foreign investors.Shortly, ISE Derivatives Market would be a fully automated screen based tradingsystem. The trading system will contain a risk management module which will befully integrated with t.he Clearing I-louse. Derivatives trading will be carried out in acontinuous auction system with market makers involved as stabilizers. The Exchangemay appoint more than one market maker for a certain derivative contr~ct. With this7mechanism, market makers will add considerable liquidity to the market, which inturn make the market more efficient.,With the help of features including a fully integrated clearing system, real-timecommunicatioll interaction and reporting activities between the trading and clearingsystem, a sound operation of the market will be realized.In this context, the initiation of stock options as a derivative instrument in the ISEDerivatives Market among others would lead to a number of opportunities as well aswould have some drawbacks in the market. The main advantages may be stated asfollows:• The introduction of traded stock options may lead to a reduction in the volatility ofreturns.• Stock options introduction may have a positive impact on stocks' trading volumes,which is the typical result for less mature markets. In these cases, the negativeimpact on trading volume from reduced stock volatility will be small andoutweighed by the positive effects from an extended investment opportunity setand improved hedging opportunities.• A positive relationship exists between bid-ask spreads and trading volume.ConsequelJ~.ly, a substantial decline in bid-ask spreads in the Turkish markets in thepost-listing period is expected.• Stock options trading may enhance stock market efficiency and/or liquidity.• Stock options trading may quicken the price-adjustment process.• Fund managers as well as portfolio managers may diversify their risks through theoptions trading.• Foreign investors may be more comfortable with the stock options tradingopportunity and this may lead at the last stage their investment to be morepermanent and long-sided in the market.While the above mentioned outcomes on' stock options trading are all positi/l.~,'thel·e, ' ',,:;;`'h,(arc a number of points that should be addressed and concluded on this subject Thesemay be noted as follows:8• The methoJ that should be pursued in the determination of risk free interest rateshould be set.• The strike priee that would be used in the `at the money` option contracts shouldbe specified carefully.• The expiration cycle that would be applicable 111 the option market should bedefined.• . The detern,1ination of the use of fixed or variable risk free interest rate in optionpricing should be decided.• The interaction of stock option markct and spotl1lnrket of the underlying securitiesshould be closely supervised.o The methods that would be used to estimate and calculate the volatility for theoption pricing should be improved and further sophisticated.In conclusion, however, the experience fro111 Turkish stock options introduction isgenerally expected to be positive, that is the beneficial aspeets of stock options tradingis expected to dominate its potential deficiencies.In the light of the information given above, the methodology pursued in this studymay be sU111marized as follows:First Chapter presents institutional information about the options markets includingthe development of options markets, some basic concepts that brings the role ofoption markets into focus and lay the foundation for an understanding of the types of,options, individuals and institutions involved in the options markets. It also examinescontract specillcations and mechanics of trading.Second Chapter discusses and illustrates the theoretical foundation of option pricing;it establishes the rational principles that must be mastered to understand how optionsarc priced. it identifies and shows why certain factors alTcct an option's price. Itexamines option boundary conditions - rules that characterize rational 9ption I)l:i~e's';/Then it explores the relationship between options that differ by exercise price alone9and those that differ only by time to expiration. Finally, it discusses how put and callprices arc related as well as several other important principles.Third Chapter deals with option pricing models, specifically the binomial and BlackScholcsmodds and examines some basic concepts on determining option prices. Inthis context, a large body of academic literature on option pricing is covered. Themodels range from the relatively simple to the extremely complex. All of the modelshave much in common, and it is necessary to understand the basic models beforemoving on to more complex but more realistic ones.This Chapter starts with models developed prior to Black - Scholes Model. Then itexamines the binomial option pricing model. After taking the binomial model throughseveral stages .. it moves on to the Black-Scholes model. Later it presents severalsimple modifications of the Dlack-Scholes model that improve its performance. Hereit is argued that the theory of option pricing will need to be modified, perhaps basedon the stochastic approach. In the discussion of the option pricing models, we try toprove that sometimes the capital markets cannot respond to fair pricing because of thecertain characteristics of the markets. Furthermore in this Chapter the sensitivityanalysis concept, thc sensitivity of the option premium to the various factors thataffect the option price, namely delta, gamma, theta, vega and rho, is demonstrated.In the Fourth Chapter, the applicability of stock options in the ISE Derivatives Marketis discussed. On the first part, the current structure of the financial futures and optionsmarket in Turkey is examined by referring to the current regulations and ongoingstudies in the capital markets. Then the applicability of the stock options on a singlestock is exmninec( ancI the positive ancI negative points of the application isinvestigated.On the secon.d part, the study has focused on the informational efficiency of Turkishstock markGt and also on stock market volatility from 1/:/'0 different, butcomplementary perspective. In the first part, the volatility trend and its tenn structurethroughout the time is analyzed. In this context, the realized voJatifHy ancI theexpected vdatility are calculated and compared under the random walk theory by10using the relevant ISE Composite Index closing values ranging between 4 January1988 and 27 ,December 1996. In the second part, tbe structure or the stock marketvolatility in Turkey has been investigated both [or the 1988-1996 period as a wholeand on a year basis so as to come up with some conclusion about onc of the mainparameters l.w~d in option pricing, namely volatility. Moreover, in this part, thevolatility, starting from January 2, 1997 /vhen two digits has been removed fro111 theindex, is analyzed by using lSE-lOO and ISE-30 Composite Index closing valuesrealized between tbe period 2 January 1997 - 18 June 1997.In this context, lhe impact of volatility on the initiation of stock option markets isdiscussed. We focus on the relationship between the stock volatility and the financialdeVelopment of stock options. In the final part of this Chapter, the potential financialand economic elTccls or option initiation in Turkish Capital Market is covered indetail.In the conclusion, a general evaluation of the following outcomes of the study ISpresented:• Exchange-traded stock options are expected to have many benefits includingflexibility, leverage, limited risk for buyers employing the right strategies in theISE Derivatives Market.• Stock options will allow the investors, especially portfolio and fund managers, toparticipate in price movements without committing the large amount of fundsneeded to l:,uy stock outright. They can use stock options to hedge a stock position,to acquire or sell stock at a purchase price more favorable than the current marketprice, or in the case of writing options, to earn premium income.• Stock options will lead foreign capital investment to be more permanent and longsidedin thc ISE Stock rvrarket as it will offer a new hedging instrument to foreigninvestors.• As n technical ciimcnsion, the rSE Derivatives Ivrnrket should set the ~xpiration,cycle, i.e. contraet months and `at lhe money` slrike prices rationally for stock/'option contracts taking the volatility of the stock market into account. In thisrespect, wilcn daily, weekly and monthly probability distribution of returns are11analyzcd in tbe lSE Stock Market, the probability distribution becomcs skewed tothe left starting from I-month investmenl horizon. So option contracts with 1-month cycle may be optimal lo be launched at the first stage of option initiation inISE Derivalives Market.• Despite their many benefits, stock options involve risk and arc not suitable foreveryone. An individual investor or corporation who desires to utilize stock optionsshould have well-defined investment objectives suited to his particular financialsituation and a plan for achieving these objectives. The successful use of optionsrequire a willingness to learn what they arc, how they work, and what risks areassociated with particular options strategies.Finally, armed with an understanding of the fundamentals, ancl with additionalinformation and assistance, both corporate and individual investors seeking expandedinvestment opportunities in today's markets will find stock options tradingchallenging, often fast moving, and potentially rewarding in ISE Derivatives Market.