Bulls Go Missing in Options for Hong Kong’s Bourse Operator

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Investors are running for cover from declines in shares of Hong Kong’s bourse as a rout in Chinese equities curbs trading in the city’s stock market.

Bearish bets on Hong Kong Exchanges & Clearing Ltd., the worst performer last month on the city’s benchmark index, became the most expensive in three years relative to bullish wagers, data on one-month options show. The average daily value of equities traded on the exchange fell about 36 percent in July from April.

The Hong Kong market has been the victim of a selloff in mainland stocks that has wiped out about $3.5 trillion. Chinese shares listed in Hong Kong slumped the second-most among 93 global equity gauges in July, with only Shanghai doing worse, and the benchmark Hang Seng Index slid for a third month. Hong Kong’s bourse, which outpaced the city’s equity rally earlier this year, is slumping even more on the way down.

“Investors may be speculating HKEx shares will drop if turnover keeps decreasing,” said Sam Chi Yung, a strategist at Delta Asia Securities Ltd. in Hong Kong. “People are more defensive right now about the market as investor confidence has been affected. Demand is increasing for puts.”

The Hang Seng Index sank 14 percent from its peak in April through Monday, while HKEx tumbled 31 percent during the period. The bourse operator had surged more than 70 percent from March 27 to a peak in May, making it among the world’s most valuable stock-exchange operators. The city’s benchmark index climbed 15 percent in that time. HKEx rose 0.2 percent as of 1:31 p.m. local time on Tuesday, while the Hang Seng Index slipped 0.2 percent.

Shanghai Tumbles

The Shanghai Composite Index tumbled 10 percent last week as the Chinese government’s efforts to put a floor in the market started to falter. The measure sank the most in eight years on July 27. Chinese companies traded in Hong Kong followed suit, falling 3.8 percent that day.

“Investors may believe HKEx may slide with the whole market if there’s selling pressure,” said Simon Lam, research director at Christfund Securities Ltd. Investors may also be buying puts to protect them from the impact of the first U.S. interest-rate increase since 2006, he said.

China isn’t the only market Hong Kong needs to worry about. With its currency pegged to the greenback, the city imports higher borrowing costs when rates are raised in the U.S. The chances of the Federal Reserve increasing interest rates this year are rising with an improving job market.

Options Costs

Implied volatility, used to gauge the cost of options, for one-month contracts with an exercise price 10 percent below HKEx was about 5.2 points more than bets on an equivalent gain on Monday, according to data compiled by Bloomberg. The gap widened to 7.4 points on July 27, the most since June 2012.

HKEx spokeswoman Lorraine Chan declined to comment on the bourse’s options. The shares traded at 26.9 times estimated earnings at the last close. That compares with 11.8 times for the Hang Seng Index.

“Valuations look expensive,” said Pauline Dan, head of Greater China equities at Pictet Asset Management Ltd. in Hong Kong. Still, “in the long term, Hong Kong Exchanges will benefit as China’s capital market becomes liberalized.”

Investors are still waiting for details of HKEx’s plan to link with the Shenzhen stock exchange for cross-border trading. HKEx Chairman Chow Chung Kong said in April the bourse planned to announce the start date in the first half of this year. A similar program with Shanghai began last November. HKEx shares jumped when the start date was given for that connection.

“We’re not going to see the same effect from the Shenzhen link,” said Michael Wu, a Hong Kong-based analyst at Morningstar Inc. “High expectations have been built up for equities trading since they peaked in April. We’re seeing more realistic expectations now.”

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