Range trade in cash highlights slow day
RANGE trading in Hang Seng Index cash and futures dominated market activity yesterday as sentiment remained lacklustre.
The November contract slipped 12 points to 9,613, where it expired. The expiry was near the money at less than a four-point premium to the cash index.
December futures fell 25 points to 9,655, a premium of 38 points over cash.
Turnover in November was 2,012 contracts, compared with an open interest of 9,732 contracts on Tuesday.
In December, there were 9,000 contracts changing hands. The open interest recorded for Tuesday was 31,009 contracts.
In index options, Jardine Fleming said trading in December out-of-the-money puts was active. Volatility buyers were long on December 9,600 calls with delta hedge.
Delta is a key measure of rate of change of an option price in relation to the rate of change in the price of the underlying asset, in this case the cash index.
Brokers covering their positions with clients will delta hedge their exposure as a result of selling or buying options to or from clients.
If prices rise, then brokers need to increase the level of cover creating a demand for the cash index. If the prices fall, then the level of cover needed falls. The rate at which the delta hedging changes is the gamma.
January options with strikes from 9,000 to 10,200 will be introduced today.
Implied volatility at the money in December was down to 18.75 per cent.
Although sentiment towards a year-end rally looks dour, the chances of a rise in volatility look more likely. This is given that the United States Federal Reserve Open Market Committee is due to meet in just over two weeks to consider a cut in interest rates.
Speculation is rising that a cut is due. This would have a beneficial impact on the Hong Kong stock market and probably would lead to a cut in domestic rates.
In the meantime, side-ways trading appears to be the name of the game. Brokers do not believe there is a lot of downside from present levels because a lot of bad news has been discounted.
Overall market sentiment is set to take its cue from North American investor sentiment as fundamentally Hong Kong looks boring.