While Chinese stocks traded in Hong Kong climbed for a fourth straight month, derivatives wagers show investors are skeptical about the market.
The Hang Seng China Enterprises Index has rebounded 23% from a low in April, and implied volatility for the gauge posted its lowest monthly average in four years. But compared with actual swings, the measure appears high. That means the derivatives remain expensive, and investors may be more reluctant to buy upside calls outright, according to BNP Paribas SA strategists Jason Lui and Scarlett Liu.
Mainland stocks were some of the world’s best performers in August thanks to cash-rich investors who poured money in them. But with data showing the economy remains weak, concerns over the sustainability of the gains have grown, and the rally in the China Enterprises Index has slowed.
“It seems likely that many traders took significant positions in July, paying higher implied vols expecting higher volatility, to trade or hedge the outcomes of the August US tariff deadline,” said Han Piow Liew, a fund manager at Maitri Asset Management Pte, a family office based in Singapore. “Once the deadlines passed without marked aggravation to the tariff situation, these positions were likely closed out at lower implied vols, with lower volatility expectations going forward.”
The HSCEI Volatility Index is now near its lowest level since September. By contrast, the measure of swings hit a high last year when traders rushed to position for further gains as equities soared on optimism over Chinese government stimulus.
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In the US, investors have grown slightly more bullish on exchange-traded funds tracking the shares. The premium for bullish three-month options over bearish contracts is back to levels from before the tariff-driven selloff in April on funds including the iShares China Large-Cap ETF and KraneShares CSI China Internet Fund, also known by their tickers FXI and KWEB. Both have similar top holdings as the China Enterprises Index.
Some traders appear to be positioning around the end of the 90-day trade truce between the US and China. An investor recently sold $40 call options expiring at the end of September equivalent to 10 million shares of FXI and bought as many November $41/$45 call spreads.
That said, overall implied volatility on the ETFs has fallen, signaling little inclination to chase the rally.
Bank of America Corp. equity-linked analysts, for their part, pointed out that they have “rarely” seen downside hedges for the FTSE China A50 Index this cheap. For protection, they recommended trades such as put ratios that have “close to zero drag” should the gains continue, while investors looking to add exposure should consider call spreads.
With assistance from David Marino.
This article was generated from an automated news agency feed without modifications to text.