VOLATILITY in trading of derivatives on the Hang Seng Index rose to nearly 50 per cent yesterday, confounding investors' hopes earlier in the week of a decline in this key yardstick. In morning trading futures slumped to a big discount to the cash market of more than 200 points. The low of the day in the January contract was 11,070 as overseas and local retail clients dumped positions. Despite a turn in local sentiment by mid-morning, the contract remained at a discount to the market all day. The cash index closed down 251 points at 11,239. January futures closed at 11,165, down 195 points and at a discount to the cash of 74 points. Turnover was 13,195 contracts and the open interest shrank to 16,870 as investors got out or rolled over positions. February futures closed at 11,170, down 220 points on the day. Turnover was 11,080 as the open interest increased to 12,144. Total market turnover was 24,276 contracts, up almost 4,000 contracts on Tuesday's activity. Options saw 1,699 trades, up just 400 on the previous day. The open interest expanded to 31,176 options. Implied volatility in the February put and calls leapt to 48 per cent at 11,000. The same options in March are at about 43 per cent and in June, 38 per cent. Jardine Fleming Global Derivatives head of research Virginia Mumford said volatilities remained very high, but there was still some retail interest. ''There is some profit-taking in long calls and some selling puts, going short into the market.'' She said some investors were using the strong downturn and high volatility at the beginning of trading to capture premium. This is a bullish trade, as they believe the market will go up. SBC Derivatives broker James Vinall said: ''The market was quite resilient after the statement from the Chinese on airport contracts after 1997.'' There was not much large-lot dealing, but South China Brokerage was said to have been buying aggressively in February futures during the afternoon. Some investors were selling strangles and straddles, indicating they believed the trading range of the cash index would stay within the 11,380 to 10,820 range for the next few weeks. Jardine Fleming's covered warrant on Cheung Kong was a 350 million, 18-month 10 for one issue. The strike price was $47.50 compared with a close of $48.50. Each warrant was priced at $1.25, putting the issue on a premium of 23.71 per cent and a gearing of 3.8. The implied volatility was 48 per cent. The issue was in line with standard market terms prevalent in the market, although the high implied volatility makes it one of the more expensive issues lately. When looking at cost as measured by volatility, account needs to be taken of the background market volatility. This is the second warrant the group has completed on Cheung Kong stock, the third by the merchant bank this year and the 21st to seek a listing on the stock exchange. On Monday, Peregrine issued a covered warrant in Hang Lung Development with a premium of 21.8 per cent, a gearing of four and an implied volatility of 41 per cent. This took place against a market which was not as volatile as yesterday's.