Short-covering sets off futures recovery
AGGRESSIVE short-covering at the opening of trading forced a sharp rebound in Hang Seng Index futures yesterday.
Implied volatility in index options remained relatively high at 30.25 per cent, but it was more than 5.5 percentage points off Monday's close.
At the opening of trading, March futures were marked up at 10,580, against the 10,360 close on Monday.
The sharp rebound in the contract continued in the initial moments of trading, pushing the contract to the high of the day at 10,705.
The contract then see-sawed through the remainder of the day. For a while the opening level acted as an intra-day point of resistance for trading. However, selling at the end of the afternoon session pushed the contract to a low of 10,555 before closing at 10,560. The close represented a 42-point discount to the cash.
April futures rose 200 points to 10,560.
Turnover was 24,318 contracts, with 23,111 in March and 1,207 in April.
Index options saw busy trading, with 4,224 lots changing hands.
Front month puts were the busiest option series of the day.
Jardine Fleming said: 'Hedgers bought March 10,000 puts while premium sellers took advantage of the recent jump in volatilities to sell 10,400 puts.' Further declines in implied volatility are expected through the remainder of the week.
Open interest in index futures for Monday was 48,687 contracts, with 39,771 in March, 3,867 in April, 4,899 in June and 150 in September.
Brokers do not expect a full recovery in the cash and futures to last week's trading levels. Without interest rate cut speculation there is little to fuel the market.
In addition, the growing tension in the Taiwan Strait is expected to keep stock market sentiment subdued and investors cautious.
Overall, China-Taiwan tension and the added uncertainty regarding the granting of a preferred trading status to the mainland by the United States could see the cash and futures lose further ground.
The Most-Favoured Nation issue could become a more significant affair than in recent years because of the tension in the Taiwan Strait and US presidential elections.