NSE Introduces Options on Futures Contracts for Six Listed Stocks. A Brief Explainer

The Nairobi Securities Exchange (NSE) has announced the launch of Options on Single Stock Futures (SSF) contracts for:

• Safaricom PLC (SCOM)
• KCB Group PLC
• Equity Group Holdings PLC (EQTY)
• Co-operative Bank of Kenya (COOP)
• I&M Holdings PLC
• Kenya Electricity Generating Company (KEGN)

Futures Contract. What is it?

A futures contract is defined as a legally binding agreement to buy or sell a standardized asset on a specific date or during a specific month. Second, this transaction is facilitated through a futures exchange.

Imagine you are a maize farmer. Today, maize is selling for KSh 3,000 per bag, but you’re worried that by harvest time the price could fall.

Step 1: Futures Contract (Booking the Price Today)

You go to a trader and agree:  “In 3 months, I’ll sell you my maize at KSh 3,000 per bag regardless of the market price then.” That’s a futures contract. You have locked in the price. If market price falls to KSh 2,500, you win. If market price rises to KSh 3,500, you miss out on the extra profit.

What is the meaning of Option on a Futures Contract? (Paying for a Choice)

Now imagine another trader tells you:  “Pay me KSh 100 today and I’ll give you the right, but not the obligation, to lock in KSh 3,000 per bag anytime in the next 3 months.” This is an option on a futures contract. You are paying for a choice, not a commitment.

At harvest:

Scenario A: Prices Fall to KSh 2,500. You use your option and activate the futures contract at KSh 3,000. You are protected.

Scenario B: Prices Rise to KSh 3,500

You ignore the option and sell at the higher market price. The only thing you lose is the KSh 100 you paid for the option.

Nairobi Securities Exchange Example

Suppose Safaricom is trading at KSh 35.

You think it could rise sharply. Instead of buying the stock immediately, you buy an option on a Safaricom futures contract. You pay a small premium for the right to enter that futures position later. If Safaricom rallies to KSh 45, the option becomes valuable.

If Safaricom falls to KSh 30, your maximum loss is the premium paid. A futures contract is like booking a product at a fixed price today. An option on a futures contract is like paying a small booking fee that gives you the choice to make that booking later if it benefits you. The futures contract is a marriage. The option is an engagement ring — you have the right to proceed, but you’re not forced to.

Derivative products such as a futures contract typically attract institutional investors, market makers, and active traders, potentially increasing liquidity in the underlying stocks.

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