Friday, May 29th, 2020

Options on Chinese Stocks

August 26, 2015 by Jim Walker  
Filed under Options Trading


Six months ago we reported on the beginning of Chinese stock options trading. At the time we quoted an article from The Economic Times regarding stock options trading on the Shanghai stock exchange.

China launched stock options trading for the first time on Monday, aiming to develop broader capital markets and give investors a tool to manage risk.

An option gives the holder the right to buy or sell an underlying asset, but -unlike futures – with the choice of whether or not to exercise the contract.

The Shanghai Stock Exchange held a ceremony for the launch of the options on an exchange-traded fund, the China 50 ETF. It tracks 50 of its largest listed firms, including banking giant ICBC and carmaker SAIC Motor.

State media have said options could cause greater market volatility, but in the long run may help investors hedge against risk and discover value investing.

As the Chinese market melts down we have to wonder just how that is turning out. Our comment was that adding options was a sign of a maturing market. However, options trading has to do with predicting and containing risk or predicting and making profits. When heavy handed government intervention distorts the market options trading turns into a crap shoot. To the extent that one owns Chinese stocks and wants to contain risk it would be smart to buy puts on virtually everything in sight. That could be profitable if the powers that be would let the market seek its own level.

Flawed Rules

Accurate assessment of stock values requires a solid base from which to work. That may not be the case in China. The Washington Post quotes a Chinese investor as saying that the rules are flawed.

When hairdresser Zhang Liang first tiptoed into the Chinese stock market back in March, things could hardly have gone better. Without any real idea what he was doing – he chose companies because their names seemed lucky or because they were backed by the government – he doubled his money in just a month. “I was so glad and said thank you to the Communist Party for giving me 50,000 yuan ($7,800),” he said. “It was so easy to make money in the stock market.” Until it wasn’t.

For millions of Chinese people seized by stock fever this spring, dreams of easy money have quickly faded, as a stock market collapse has gathered pace and roiled global markets. The plunge has raised fresh doubts about the government’s ability to manage the economy and fueled a weary cynicism about inequality of opportunity in China’s one-party state.

“The government made the rules of the game, and the rules are flawed,” Zhang said. “Ordinary people are always sacrificed when disaster strikes.”

The last year before the plunge of the Chinese market is reminiscent of how American approached stocks in the 1920s, playing the market. Then when the too good to be true market started to tank the Communist government used the same sort of heavy handed tactics that they use to maintain order in society by ordering traders not to trade and trying to bribe the market into rising. The problem is that investors are not dumb and they see that their profits will be hostage to the whims of the government. So, everyone wants out and that only gives traders one option trade to make, providing that the government does not ban it altogether.

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