In recent days, there has been a surge in bullish options trades on several US-listed Chinese exchange-traded funds (ETFs). Traders are capitalizing on a slump in bullish sentiment towards Chinese companies, placing contrarian upside bets. This trend emerges as investors, who initially had a positive outlook on China this year, anticipating a robust economic recovery as the world’s second-largest economy emerged from pandemic disruptions, have been largely disappointed due to softening economic indicators.
Notably, the iShares MSCI China ETF (MCHI.O) and the iShares Trust-China Large-Cap ETF (FXI.P), the two largest US-listed Chinese ETFs with approximately $13 billion in assets, have experienced declines of 16% and 14% respectively from their January highs. Another China ETF, the KraneShares CSI China Internet ETF, which tracks overseas-listed Chinese internet companies, has also declined by 19% from its January high.
On Wednesday, the options volume for KWEB, an ETF focused on Chinese internet companies, surged to 224,000 contracts, which is three times its average daily volume. This increase was fueled by a large bullish trade, where a trader purchased around 40,000 KWEB call options. These call options would yield profits if the shares of KWEB rose above $35, which represents a nearly 20% increase from its current level, by mid-January 2024. Call options are typically purchased to express a bullish view as they provide the right to buy shares at a predetermined price in the future.
This recent significant trade follows other bullish options trades on Chinese ETFs in recent sessions. For instance, on June 2, a trader acquired 60,000 call options with a strike price of $29 expiring on June 30th on the China Large-Cap ETF (FXI.P). Moreover, on June 8, Trade Alert data revealed a buyer of 71,000 call spreads for the August 28-30 expiration on the Xtrackers Harvest CSI 300 China A-Shares ETF.
According to Alex Kosoglyadov, the managing director of equity derivatives at Nomura, while the positive sentiment may not be as strong as during the China reopening phase, there is still an underlying positive sentiment among investors. They are actively seeking ways to position themselves for upside potential in ETFs using options. One factor driving these bullish options trades is the decrease in implied volatility, which is a measure of investor expectations for price swings in the shares, to one-year lows for several of these Chinese ETFs. Amy Wu Silverman, an equity derivatives strategist at RBC Capital Markets, highlighted that last year, the “China reopen” story dominated discussions, but consumer strength in China has somewhat disappointed. She also noted that currently, options offer a relatively cheaper means to leverage upside potential in China.
In conclusion, there has been a notable increase in bullish options trades on US-listed Chinese ETFs as traders adopt a contrarian approach amid a slump in bullish sentiment toward Chinese companies. Disappointing economic indicators have dampened investors’ initial optimism about China’s economic recovery. However, the decline in implied volatility for these ETFs has made options an attractive and cost-effective way to express a positive outlook on China. Despite a moderated level of positive sentiment, investors are actively seeking opportunities to position themselves for potential upside in Chinese ETFs.
