Friday, February 19, 2010

China Options Show Biggest Risk of Stock Drop in Year (Update1) Share Business Exchange

By Michael Patterson and Jeff Kearns



Feb. 19 (Bloomberg) -- Options traders are paying cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 most to protect against a drop in Chinese stocks since cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 depths of last year’s global financial crisis as policy makers in Beijing take steps to cool economic growth.



The gap between cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 implied volatility of options betting on a decline in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 iShares FTSE/Xinhua China 25 Index Fund and those that would profit from a gain widened to 7.4 on Feb. 17, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 biggest since March, and was at 6.9 yesterday, according to data compiled by Bloomberg. Implied volatility is a measure of expected stock swings and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 key gauge of options prices.



The exchange-traded fund, which holds shares of Chinese companies and trades on U.S. bourses, has dropped 14 percent from its 2009 high on Nov. 16 as cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 People’s Bank of China ordered lenders to set aside larger reserves in a bid to cool inflation in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 fastest-growing major economy. Investors are also concerned that China may let its currency strengcá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365n, making exporters less competitive, according to AlphaShares LLC.



“There’s a lot of anxiety about how policy makers keep increasing cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 reserve ratio for banks and what a strengcá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ning yuan would do to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 giant export machine,” said Jonathan Masse, who helps oversee about $480 million in Chinese stocks at Walnut Creek, California-based AlphaShares, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 fund company co- founded by Princeton University economist Burton Malkiel.



The FTSE/Xinhua China 25 Index tumbled 3.1 percent as of 8:30 a.m. in London after cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 U.S. Federal Reserve unexpectedly raised its discount rate, heightening concern that tighter monetary policy around cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 world will slow cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 global economic recovery. The iShares ETF tracks cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 FTSE/Xinhua China 25 Index.



Put Options



Options granting cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 right to sell cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ETF in three months for 10 percent below current prices have a so-called implied volatility of 35.35, compared with 28.42 for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 equivalent options to buy, Bloomberg data show. The last time cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 gap was this wide, global equities were falling to six-year lows on concern bank losses would spur a repeat of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Great Depression.



The ETF’s most-traded option yesterday was a put giving cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 right to sell shares at $35 by May 21. The fund climbed 1 cent to close at $39.71 in New York trading yesterday. Options linked to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ETF had cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 27th highest volume last year for all indexes and equities, according to data from cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Options Clearing Corp.



The open interest, or number of existing contracts, for all puts has risen 8.8 percent in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 last week to 1.43 million, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 highest level since November. Open interest for call options giving cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 right to purchase cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ETF has increased 4.4 percent to 660,141.



‘Outsized Demand’



The largest open interest increase during cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 past two weeks was for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 May $28 puts, which surged 23-fold to 34,214, according to data compiled by Trade Alert LLC, a New York-based provider of option market analytics. The number of May $27 puts rose 68 percent to 38,748 for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 second-biggest increase. The ETF hasn’t closed below $37 since July.



“There’s been outsized demand for downside puts,” said Justin Golden, a strategist at New York-based Macro Risk Advisors LLC, which advises institutions on equity derivatives. “This is related to a heightened degree of uncertainty around cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 speed at which China will tighten policy in addition to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 potential for a currency revaluation at some point in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 near future.”



China’s central bank said on Feb. 12 that it will lift reserve requirements for banks for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 second time this year on Feb. 25. Policy makers are reining in credit growth after banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January and property prices climbed cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 most in 21 months.



Currency Bets



China may let its currency appreciate by 5 percent as early as next month to prevent economic growth from stoking inflation, Stephen Jen of BlueGold Capital Management LLP said in an interview this week. Goldman Sachs Group Inc. Chief Economist Jim O’Neill said this month that a decision by China to revalue cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 currency as much as 5 percent “could happen at any time.”



China has controlled cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 yuan’s exchange rate since July 2008 by buying U.S. currency, keeping it at about 6.83 per dollar. China’s “first challenge is inflation expectations,” People’s Bank of China Deputy Governor Zhu Min said on Jan. 30.



The China ETF holds shares of 25 Chinese companies including China Mobile Ltd., cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 world’s largest phone carrier; Industrial & Commercial Bank of China Ltd., cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 biggest lender by market value; and Aluminum Corp. of China Ltd., cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 nation’s biggest producer of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 metal.



“As investors seek a general market downside protection, FXI put options become a favored choice,” said Rebecca Cheong, an equity derivatives strategist at Societe Generale SA in New York, referring to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 ETF’s stock ticker. “Our desk has seen consistent FXI put buying flow cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 last few weeks.”



To contact cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net.

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