MorningWord 6/17/15: Tiny Bubbles Make Me Happy $ASHR $FXI

by Dan June 17, 2015 9:43 am • Commentary

The peeps who run Bloomberg’s social media like this article on Chinese equities so much they seem to be running a contest to see which title gets the most play on Twitter.


It looks like this morning’s (the second one) is getting more action than yesterday’s version. I can’t wait to see how they phrase it tomorrow.

I don’t mean to pick on them, the article is a very good summary of the issues facing China. And there’s some worthwhile commentary by market participants in the region. But there’s nothing particularly new here.

China’s equity rally in the last year has caught a good bit of attention in the U.S. as it represents the sort of exuberance that many pundits would love to attach to our equity markets, but have been unable to do aside from some small pockets. I have made the argument on many occasions in this space that the bubble as it relates to equities is not valuation, or price action, but merely in complacency.  Investors have shown little fear of late of the potential for a correction, and certainly few expectations for a crash like 2000 or 2008 in the offing. As for China, the Shanghai Shenzhen CSI 300 Index, as Bloomberg describes:

The CSI 300 Index is a free-float weighted index that consists of 300 A-share stocks listed on the  Shanghai or Shenzhen Stock Exchanges. Index has a base level of 1000 on 12/31/2004.

The CSI 300 is up 125% year to date, 47% from its 200 day moving average at 3500, a level the index consolidated in and around for the better part of the first quarter before taking off on its parabolic run in Q2:

CSI 300 Index 1yr chart from Bloomberg
CSI 300 Index 1yr chart from Bloomberg

Recently I have become aware of surging options open interest in Deutsche X-Trackers Harvest CSI A-shares etf (ticker: ASHR) which tracks the CSI 300, from Bloomberg:


Options open interest is fairly evenly split between calls and puts at 209,000 vs 214,000 respectively. But call volume over the last month has been 1.5x that of puts with the three largest strikes of open interest, all calls in July with 17,500 of the July 55 calls, 15,000 July 60 calls and 14,800 of the July 65 calls. Monitoring options open interest can tell you little if anything about the future direction of the underlying, but a build up in open interest in what appears to be untied purchases or sales can certainty serve as a useful input when considering investor sentiment. I bring up the ASHR as I, like most U.S. investors / traders have found the correlation of the IShares China Large Cap etf (FXI) made up of H-Shares listed in Hong Kong to not capture the euphoria that has taken place in the recent mainland equity mania. 

ASHR could be the exact vehicle to trade for those who want to play for a further expansion of the bubble, or for those looking for it to burst. We are not in the business of shorting bubbles, but options prices in ASHR are not as expensive as one would expect in light of the recent explosion in open interest, as 30 day at the money implied vol (blue below, the price of options) vs 30 day at the money realized vol (white below, how much the underlying has moved) are both about 40%, making options prices look pretty fair:

ASHR 30 day at the money IV (blue) vs 30 day at the money realized vol (white) from Bloomberg
ASHR 30 day at the money IV (blue) vs 30 day at the money realized vol (white) from Bloomberg

This trading vehicle has caught my eye, we will be sure to look for ways to play at what we perceive to be near term inflection points.