In the past 10 days, HSBC shares have put on a 25 per cent rebound. Very attractive indeed. In case you are amazed or even tempted to join the cause, read this. Scene one: On March 10, a tai-tai called up her private banker, saying she would like to buy several million US dollars worth of HSBC April put options at HK$25 each. In layman's terms, she was offering to sell the share at HK$25 in early April. In short, she expects the stock to go below HK$25 after the bank has completed its rights issue. Mind you, HSBC had just traded down to the 10-year record low of HK$33 a day before, scaring the devil out of many. Rich people make all sorts of interesting bets. Private bankers are no stranger to these. But the size the woman offered did raise eyebrows. And she's not alone. Many more tai-tai came up with offers along the same line that day with various bankers. 'It's just phenomenal, and they are no ordinary tai-tai,' said one of the private bankers involved. Scene two: Some HSBC-holding 'high-net-worth individuals' - a jargon used by bankers to describe those with tens of million dollars - received calls with opposite messages from investment banks. The banks were offering to write HSBC put options at HK$55 each. Again in layman's terms, the banks were offering to buy HSBC shares at HK$55 each while the buyers of the put option were offering to sell at that price in a month's time. If we discount the price of the rights included, that offer translates into a bet price of HK$46 to HK$47 per share. Scene three: Various types of equity-linked notes (ELN) on HSBC are on offer. In one case, holders of the note are obliged to buy HSBC at HK$23 if its share price falls below that level. Should it go above HK$23, the holder gets 9 per cent interest. In short, you buy the notes if you don't believe the stock will go under HK$23. Totally confused with the put and call, long and short? Welcome to the over-the-counter market of derivatives. It is big. The tai-tai easily completed her multimillion-US-dollar deal. It is opaque. Different from trading on the exchange, the pricing and trading of this market are only available to those high-net-worth individuals and financial institutions. It is complicated. The structure of the derivatives and hedging activities behind them are so complex that it is almost impossible to tell from a single move hether a player is betting the stock will go north or south. Say, instead of being optimistic about HSBC's outlook, the investment banks that are writing the HK$55 put option may merely be hedging against earlier shorting moves. With a US$17.7 billion rights issue on the horizon, HSBC has become a major play in this huge black box in the last few months. There are shareholders who have to put more money into HSBC and want to hedge against future price dives. There are underwriters who may end up holding the stock in case of under-subscription and also need to hedge. There are players who know this demand and are positioning to profit from it with derivatives. Then there are underwriters who know the position of these players and try to outsmart them. The list goes on. With a huge amount at stake, no one hesitates to manipulate the price. Remember the dramatic fall of HSBC shares from HK$38 to HK$33 in the last minute of trading on March 9? That will knock out many ELN holders who bet the price would go below HK$35 - and bring a handsome profit to the issuers. The sharp increase in the volatility of HSBC, which has been nicknamed 'the big elephant' not just for its conservative strategy but also its share-price stability, is therefore no surprise. Over the past five years, the bank has recorded a median volatility of 12.722 per cent. In the past six months, it has shot up to 73.39 per cent. 'The big show - or should we say the time of a big kill - has yet to come,' said a private banker. As trading of the rights begins on Monday, new fuel will be added. It will not only increase the supply of underlying assets for the structuring of more derivatives and the manipulation of the offer's pricing, but, more importantly, at a much lower cost. For example, players experienced much difficulty and high cost in borrowing HSBC shares recently. They need the stocks for any short-selling move. The new supply will largely solve this problem. The rights issue will increase the number of shares about 40 per cent. Besides, the rights come at a fraction of the price of the ordinary shares. A trading price of about US$40 for the share implies a US$12 price tag for the rights. That encourages and facilitates more aggressive bets. All these remind me of what happened with a former blue chip - PCCW - in 2001. It was the first year of Hong Kong Telecom's merger with Richard Li Tzar-kai's internet-cum-property firm. PCCW issued billions of dollars worth of convertible bonds to repay part of its debt. The convertible bond, basically a bond plus an option to buy, provides hedge funds with a cheap means to bet against the stock. The hedge funds bought the convertible bond, sold the bond element, kept the option, shorted the stock and fuelled the downward spiral of the phone company once well known for its price stability. Eight years have come and gone. We have a far more sophisticated and complicated derivatives market. What is leading the bank's share price is anybody's guess. There is one thing for sure - the coming month will be very volatile. As the big boys lock horns, small investors like you and me had better stay away or risk being run over in the bloody fight.