Bullish options underpin bets on Chinese stocks rallying by up to 27% in Hong Kong

Bullish call options on Hang Seng Index and Hang Seng China Enterprises Index suggest traders are betting on an end to five-week sell-off

‘Sometimes when fear and panic take over the market, it is also a sign that we might be getting close to bottoming,’ Hang Seng Indexes Co says

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People streaming past a bank outlet and electronic boards showing stock prices and indices in Mong Kok, Hong Kong. Photo: Sam Tsang

Published: 7:30am, 11 Oct 2023

Some investors are expressing their bullish view of Hong Kong-listed Chinese stocks through the options market as valuations cheapened, with outstanding contracts implying an upside of as much as 27 per cent, according to Hang Seng Indexes Company.

Bullish call options on Hang Seng Index exceeded bearish put options by 58,564 to 53,123 based on open interest on October 5, suggesting more traders are positioning for a market rebound after five weeks of losses, the city’s index compiler said in a blog post on Tuesday.

The 0.91 times put-to-call ratio on the 80-member Hang Seng Index is below its five-year average of 1.2 times, it added. The same ratio for the 50-member Hang Seng China Enterprises Index stood at 0.94 times, versus its five-year average of 1.5 times.

A simple regression analysis of both put-to-call ratios since January 2018 implies there is a 19 to 27 per cent upside to the indices respectively, it added.

Call options are financial contracts that give the buyers the right, but not the obligation, to buy a stock, bond, commodity or index at a predetermined price within a specified period. They profit when the underlying asset increases in value.

The Hang Seng Index climbed 0.8 per cent to 17,644.73 on Tuesday, approaching a two-week high, as mainland Chinese funds ploughed about US$790 million into H shares in addition to US$277.8 million on Monday. They bought US$18.6 billion of the shares last quarter, triple the amount in the preceding three months.