Monday, May 25th, 2020

How Soon Will the Chinese Stock Market Die?


Both the rise and fall of the Chinese stock market have been spectacular. The Shanghai Composite Index closed at 2,109 on January 2, 2014. On January 5, 2015 it closed at 3,350. And on July 17, 2015 it closed at 3,927, nearly twice its value of 18 months previous. The Chinese stock market was the envy of the world for about a year. Then began the long and painful slide of Chinese stocks. According to Reuters the Shanghai Composite Index closed at 2,749 on January 26, 2016 having given up 22 percent of its value since the first of 2016 and a 30 percent loss from its July 2015 high. Reuters reports that a late selling frenzy took shares down.

Chinese shares plunged more than 6 percent to 14-month lows on Tuesday after oil prices dropped again, reviving concerns about global growth and prompting a sell-off in the world’s equity markets.

Battered by a late selling frenzy, the benchmark Shanghai Composite Index .SSEC ended down 6.4 percent at 2749.79 points, its lowest close since Dec. 1, 2014.

The CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen dropped 6 percent to 2940.51, also its lowest since the beginning of December 2014.

After a rebound on Friday and early Monday, crude prices fell back below $30 a barrel, not far from last week’s 12-year lows, ending a couple of days of gains for Wall Street stocks.

China’s fickle stock markets have now slumped about 22 percent so far this year on concerns about the slowing economy and confusion over the central bank’s foreign exchange policy.

The main driver in China’s market today is panic. The government has forbidden large investors to trade so, when these folks are allowed to sell it could spell the end of the Chinese stock market. How does this affect trading elsewhere and how should an options trader position himself?

Stock Options and Bay Area Real Estate

Every time the Chinese stock market falls, markets retreat across Asia, Europe and then North America. You do not have to be directly involved in the Chinese stock market to experience its effects. An interesting article from ABC 7 News in San Francisco says that a falling Chinese market is impacting the Bay area real estate market.

“The Chinese economy has seen quite sharp drops in the stock market as well as general economic activity,” said Ralph McLaughlin, the chief economist for Trulia.

The U.S. stock market has followed suit and the ripples are starting to hit the Bay Area real estate market.

Mortgage broker John Holmgren says some of his local clients, who are relying on their stock portfolios for a down payment on a house are having second thoughts.

“We have a lot of clients, who are from the tech sector and they had stock options they were about to exercise that were in the money that would allow them to cash in and make a down payment. Now, not so much,” explained Holmgren.

And it’s not just local buyers. Chinese buyers make up between six and 10 percent of home buyers in San Francisco.

As we wait for the next drop in Chinese stocks how can you position yourself?

Puts, Puts, Puts

If you think that any stock is going to fall in value the best choice is a put option.

A put contract gives the buyer the option to sell the underlying equity which he will do if the equity price moves in the direction anticipated.

To the extent that the Chinese stock market will keep falling and driving down US stocks there are a large number of companies on which puts would be profitable. As always do your own homework before buying or selling options

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