China’s Stock Options Traders Are the Most Bullish This Year

  • Cost of call options versus puts climbs to 2016’s highest
  • ‘There are expectations for catch-up plays,’ BNP’s Maurer says

Three Key Themes Emerging in Asian Markets

China’s options traders are betting that one of the world’s worst-performing stock markets is due for a rebound.

The cost of bullish contracts on the China 50 exchange-traded fund is near the highest level this year relative to bets that profit from a decline, data compiled by Bloomberg show. While the mainland ETF is up 17 percent from its 2016 low, that rebound has been dwarfed by a surge for Chinese stocks traded in Hong Kong. With a 15 percent drop this year, the Shanghai Composite Index is the fifth-worst performer among 94 global measures tracked by Bloomberg.

“People might be buying some call options as there are expectations for catch-up plays,” said Caroline Maurer, head of greater China equities at BNP Paribas Investment Partners in Hong Kong. Other “markets have gone up sharply. A-shares may well be stimulated as this under-performance has been too long.”

Options traders are speculating the benchmark Shanghai gauge will end a five-month stretch of meandering near the 3,000 level, after the Hang Seng China Enterprises Index’s 29 percent rebound from a February low narrowed the discount on Hong Kong shares to the smallest since 2014. Bocom International Holdings Co. says investors are also trading options because -- Monday’s slump aside -- the cash market is so dull: China’s benchmark equity index has moved less than 1 percent at the daily close for 20 of the past 21 sessions. The gauge dropped 0.7 percent on Friday.

November High

The H-share index climbed to its highest level since November last week, when 90 percent of its members traded above their 200-day moving average, the highest proportion since August 2014. Ten-day volatility on the Shanghai Composite slid to a 25-month low.

Both markets were swept into a global selloff on Monday amid concern that central banks may be less willing to add to unprecedented stimulus. Some calm resumed Tuesday, when the Shanghai Composite ended 0.1 percent higher. The Hang Seng China gauge rose as much as 1.7 percent before ending the day 0.9 percent in the red amid reduced chances of economic stimulus and as a pre-holiday suspension of buying through a cross-border equity link took a key investor bloc out of the market.

Calls that pay out on a 10 percent advance in the China 50 ETF cost 2.2 points more on Tuesday than puts betting on a 10 percent retreat, according to implied volatility data on three-month contracts. The premium widened on Sept. 7 to the most this year. The fund, which tracks the performance of Shanghai’s large-cap stocks and is the only mainland security on which options trading is allowed, fell 7.2 percent this year.

Spurring Rallies

In February and June, the last time that the relative options prices approached close to this level, a rally of about nine to 10 percent in the SSE50 index followed in a month or so, according to Nick Cheng, chief derivatives trader at Liquid Capital Markets Ltd. in Hong Kong. “Technically I do see a breakout on the upside from the chart,” he said.

Some investors are turning to the options market to make bets as it reduces the cost of trades in a low-volatility environment, according to Hao Hong, chief China strategist at Bocom International. Mainland shares are unlikely to jump anytime soon, because state funds are speculated to be muting moves in either direction, he said.

Still, technical indicators have turned more positive for the Shanghai gauge. The index’s 50-day average last week crossed its average level for the past 200 days, a bullish pattern known as a golden cross.

To read about China’s grip on its stock market, click here.

On the economic front, there are also signs of improvement. The government’s manufacturing gauge for August climbed to its highest since 2014, while reports this week showed that factory output, investment and retail sales all exceeded estimates.

That’s spurring U.S. traders to turn bullish, too. About 1.4 percent of the biggest U.S.-listed exchange-traded fund tracking mainland stocks was sold short as of Sept. 9, down from almost 4 percent in mid-July, IHS Markit Ltd. data compiled by Bloomberg show.

“Some investors are probably betting that A shares will eventually go up,” said Castor Pang, head of research at Core-Pacific Yamaichi Hong Kong. “The stock market has been in a narrow range for a very long time and this may be leading more investors in the options market to bet that that the government will probably stimulate the market somehow.”

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