In battered Chinese stocks, traders favour ‘lottery ticket’ trade

In the wreckage of China’s stock-market meltdown, Wall Street traders are making long-shot bets that officials in Beijing can stoke a recovery.

Investors are finding moments to snap up options tied to US-listed exchange-traded funds that track Chinese equities, which have been whipsawed by Covid lockdowns, regulatory pressure and a property crisis. It’s evidence that some traders – who have seen shares from Beijing to Hong Kong slump 60 per cent from a 2021 peak – want exposure to the stocks, just in case the government eventually succeeds in stoking a rebound.

“It’s simply buying cheap lottery tickets with a potentially big payout,” said Charlie McElligott, managing director at Nomura Securities International. The worse Chinese stocks have got, “the more attractive it becomes from a risk-reward perspective.”

With Chinese leaders keen to stop the stock-market sell-off, the bets in ETF options are proof that investors are taking notice. Even if most traders are too shy to buy the equities outright, options offer a way to maximise profits while minimising potential losses.

Plus, US-based ETFs are trading as some local financial markets close for the Lunar New Year holiday.