Big Printin’ – an $ASHR away from bottom?

by Dan May 31, 2016 4:03 pm • Big Printin'

In case you missed it, Chinese stocks had a day yesterday with the CSI 300 Index & the Shanghai Composite closing up 3.3% overnight, while the Shenzen was up 4% on rumors that the MSCI might start to include mainland Chinese stocks in their global indices.

Options volume in Deutsche X-Trackers Harvest etf (ASHR) that tracks the performance of the CSI 300 Chinese mainland index was 5x avg daily with calls out-numbering puts 2 to 1.  The largest trade of the day was a buy of 10,000 July 24.90 strike calls for 65 cents to open when the etf was $24.10, or spent $650,000 in premium. Break-even in these calls is up at $25.55, up 6% from current levels.

You’ve seen the carnage, the CSI 300 and the Shanghai are down more than 40% from their 52 week highs, and in a massive downtrend:

CSI 300 2yr chart from Bloomberg
CSI 300 2yr chart from Bloomberg

Options prices in the ASHR, the etf that tracks the CSI 300 appear fairly cheap in vol terms, with 30 day at money implied volatility at 34%, just above 2016 lows, and well below 52 week highs of 91%:

ASHR 1yr chart of 30 day at the money implied vol from Bloomberg
ASHR 1yr chart of 30 day at the money implied vol from Bloomberg

The risk to owning short dated premium in the ASHR is that the consolidation it has been stuck in for what feels like months continues and out of the money options premiums just melts.