(Bloomberg) — A Bank of America Corp. options strategist who correctly anticipated gains in the past now says the rally that has made Chinese stocks some of the best in the world this year may have more room to go. . And many are positioning themselves for it.
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Demand for bullish bets has increased since the country announced a series of initiatives to revive its economy, according to Lars Naeckter, head of Asia Pacific equity derivatives research. The cost of calls versus puts is near its highest level since at least 2008 for Chinese stocks listed in Hong Kong, as well as for a U.S. exchange-traded fund that tracks the stocks.
While the Hang Seng China Enterprises Index has given up nearly half of its recent gains, Naeckter says the market could still rally further given the country’s political turn and investors’ appetite to re-enter trading. In early September, when the stock indicator was trading near a low, he recommended a bullish options structure that returned more than 360%. Hang Seng Enterprises rose in early trading on Friday.
“The opportunities are still there,” Naeckter said in an interview in Hong Kong this week. “There is significant growth potential for this market from now on, as we balance uncertainty with ongoing stimulus measures in terms of scope and timing.”
Like Bank of America, other companies see more profits ahead. At Goldman Sachs Group Inc., the trading desk last week recommended Hang Seng Enterprises call spreads and collars (buying puts while selling calls) to take advantage of high implied volatility.
Bank of America recommended earlier this month moving Hang Seng Enterprises’ September trade to the November/December calendar call spread collars that will also cover the upcoming US presidential election; The firm expects volatility to remain high until the vote and fall afterward. Additionally, Naeckter’s team suggested bullish options strategies on the US-listed iShares China Large-Cap ETF.
“There will be continued noise between the United States and China and continued uncertainty around that,” Naeckter said in Monday’s interview. “However, for market participants, the biggest elephant in the room is Chinese politics and upcoming meetings.”
Investors are awaiting the meeting of China’s top legislative body, the Standing Committee of the National People’s Congress, in the coming weeks as it will need to approve any additional fiscal budget or bond installments.
The Chinese stock market has been on a rollercoaster ride since late September, when a series of stimulus measures sparked a burst of optimism that is now cooling. As Beijing takes its time to detail a fiscal spending plan, skepticism is growing over whether authorities are willing to deploy more firepower to turn around the economy and markets.
Also Read: Chinese Stocks Fall Toward Correction as Stimulus Hopes Dim
At a derivatives trading forum in Hong Kong on Monday, Peter Yip, head of currencies and emerging markets at JPMorgan Chase Bank, was among those who noted that demand for hedging from China has also increased given the doubts surrounding the plans. of the nation’s stimulus package, the outlook for global interest rate cuts and the US elections.
Additionally, investors want to avoid a repeat of the boom-and-bust episode of 2015, when Chinese stocks spiraled out of control, hitting a seven-year high even as economic growth disappointed, a situation that is unsustainable in the long term. Naeckter said. .
“There remains a good deal of skepticism, which is good in the sense that we may not overcome the upside,” he said.
–With the help of Sangmi Cha and Henry Ren.
(Updates chart for last close, adds Friday’s trading in third paragraph)
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