Asia's Top Stock Market Is Suddenly Drawing a Crowd of SkepticsBy
Volume of bearish options on Hong Kong’s benchmark gauge jumps
The cost of hedging the index is above its annual average
Start your day with what's moving markets in Asia. Sign up here to receive our newsletter.
Even as Hong Kong shares are holding on to their eighth straight monthly gain, recent derivatives activity shows investors are getting jittery about Asia’s best-performing market this year.
Bearish options volume on the Hang Seng Index is heading for its highest level since August 2011 this month, with the ratio of outstanding puts versus bullish calls near a 10-year peak. The hedging is happening as the benchmark gauge surged 25 percent since January, reaching a more than two-year high Aug. 8.
While a stabilizing Chinese economy and brighter earnings prospects have helped lift the Hang Seng Index, gains concentrated in some heavy-weight stocks such as Tencent Holdings Ltd. are raising concerns they may turn to pitfalls. And recently, the growing tension surrounding North Korea and worries over the impact of U.S. President Donald Trump’s administration on Asian shares have prompted investors to hedge, according to Hao Hong, chief strategist at Bocom International Holdings Co.
“There is just so much uncertainty in a market that is at a very high level,” Hong said in a phone interview from Hong Kong. “Right now all the options are being priced at low-volatility levels, so if you load up on options now, when volatility increases you can use that to benefit.”
Stock swings remain below their five-year average, even though the HSI Volatility Index has rebounded 40 percent from a low in July. As the strength of the equity rally eased this month, almost 30,000 Hang Seng Index bearish options changed hands on average each day, compared with about 19,500 bullish ones. As of Tuesday, there were more than two puts for each call outstanding, with eight of the most-owned contracts being bearish.
Investors growing more cautious are paying up for options protecting against declines, according to Shuai Chen, an equity and derivative strategist at BNP Paribas SA in Hong Kong. The cost of bearish versus bullish three-month contracts on the Hang Seng Index has rebounded from a low earlier this year and is almost a third above its one-year average, data compiled by Bloomberg show.
Bocom’s Hong predicts that the Hang Seng Index will decline in the coming weeks before it could head for a new high. A 10 percent drop is also possible, he noted.
“We saw a close to 5 percent correction two weeks ago but it was shallow and brief, and it’s not what we’re waiting for,” Hong said. “Once we get to around 10 percent, we should see a decent rebound as people start bottom fishing.”