(Bloomberg) -- A Bank of America Corp. options strategist who correctly anticipated gains in the past is now saying the rally that’s made Chinese equities some of the world’s best this year may have more room to go. And many are positioning for it.
Demand for bullish bets has increased since the nation announced a slew of initiatives to revive its economy, according to Lars Naeckter, the bank’s head of Asia Pacific equity derivatives research. The cost of call options versus puts is near its highest level since at least 2008 for Chinese stocks listed in Hong Kong as well as for a US exchange-traded fund tracking the shares.
While the Hang Seng China Enterprises Index has given up almost half of its recent gains, Naeckter says the market could still rally further given the nation’s policy pivot and investors’ appetite to re-enter the trade. In early September, as the equity gauge traded near a low, he recommended a bullish options structure that returned more than 360%. The Hang Seng China Enterprises Index rose as much as 2.9% on Friday.
“The opportunities are still there,” Naeckter said in an interview in Hong Kong this week. “There’s significant upside potential for this market from here, as we balance the uncertainty with the ongoing stimulus measures in terms of scope and timing.”
Like Bank of America, other firms are seeing more gains ahead. Over at Goldman Sachs Group Inc., the trading desk recommended last week Hang Seng Enterprises call spreads and collars — buying puts while selling calls — to take advantage of the elevated implied volatility.
Bank of America advised earlier this month to roll the September Hang Seng Enterprises trade into November/December calendar call spread collars that will also cover the upcoming US presidential election — the firm expects volatility to remain elevated until the vote and fall after. Additionally, Naeckter’s team suggested bullish options strategies on the US-listed iShares China Large-Cap ETF.
“There is going to be continued noise between the US and China and the ongoing uncertainty around that,” Naeckter said in the interview on Monday. “However, for market participants, the bigger elephant in the room is Chinese policy and the meetings that are coming up.”
Investors are waiting for the gathering of China’s top legislative body, the National People’s Congress Standing Committee, in the coming weeks as it will need to approve any extra fiscal budget or bond quota.
The Chinese equity market has been on a roller-coaster ride since late September, when a series of stimulus measures unleashed a burst of optimism that’s now cooling. As Beijing takes its time in detailing a fiscal spending plan, skepticism is growing about whether authorities are willing to deploy greater firepower to turn around the economy and markets.
Also read: Chinese Stocks Slide Into Correction as Stimulus Hopes Wane
At a derivatives trading forum in Hong Kong on Monday, Peter Yip, head of currencies and emerging markets at JPMorgan Chase Bank, said demand for China hedges has also increased given the outlook for interest-rate cuts globally.
Plus, investors want to avoid a repeat of the boom-and-bust episode from 2015, when Chinese stocks spiraled out of control, reaching a seven-year high even as economic growth disappointed — a situation that’s unsustainable in the long run, Naeckter said.
“There remains a healthy dose of skepticism, which is good in the sense that we may not get an overshoot on the upside,” he said.
--With assistance from Sangmi Cha and Henry Ren.
(Updates market prices. An earlier version of this story corrected comments by a panelist at a forum in paragraph 10)
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