China’s Options Markets Go Wild as Trade Tensions Flare Up

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Chinese traders are running for cover in the options market as renewed trade tensions with the U.S. trigger volatility in stocks and the yuan.

Total open interest inChina 50 ETF call options surged to a record 1.95 million contracts last week, while a gauge measuring demand to buy bearish contracts on the offshore yuan soared by the most since early 2018, according to data compiled by Bloomberg. Tweets from U.S. President Donald Trump threatening to raise tariffs on Chinese goods triggered a $624 billion rout in onshore equities, with shares rallying on Friday as the additional duties set in and Beijing took steps to support the market.

With limited ways to hedge — the ETF tracking some of the nations’ biggest stocks is the only mainland security on which options trading exists — volumes are likely to remain elevated until investors get more clarity on trade, according to Wang Chen, a Shanghai-based partner with XuFunds Investment Management Co.

“Everyone is scrambling for a hedging tool and that’s led to the high open interest in the options market,” said Wang. “No one knows what could come out of the trade negotiations as the talks drag on, and that brings great uncertainty.”

Open interest in China 50 ETF call options contracts expiring in May reached a level so high that it triggered a regulatory limit twice last week, according to notices from the Shanghai Stock Exchange as of Friday afternoon. While volume has spiked this year, the underlying fund has seen outflows. Meanwhile, open interest in put options has climbed, peaking in April.

The city’s equity benchmark tumbled as much as 7.8% intraday last week from the end of April, while the offshore yuan slid about 1.4% in the five days through Friday. Trade tensions escalated last week as the U.S.hiked levies on more than $200 billion in goods, prompting China to immediately say it is forced to retaliate. In a volatile trading session on Friday, people familiar with the matter said Chinese state-backed funds wereactive in buying domestic equities.

Worst Yuan Drop Since 2016 Catches Options Traders Off Guard

The yuan has become part of the trade negotiations after the U.S. raised concern that Beijing is deliberately depreciating its currency. The offshore yuan’s three-month risk reversal jumped 39 basis points earlier last week, the most in more than a year, reflecting higher demand for short-yuan wagers in the options market.

— With assistance by Amanda Wang, and Ludi Wang

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