Institutional investors and market-makers are moving quickly to trade options on the two physical A-share exchange-traded funds, the CSOP FTSE China A50 and China AMC CSI 300, which enable them to hedge or seek arbitrage opportunities.
In less than two weeks since these options were listed in Hong Kong, open interest volumes of call and put contracts on the China AMC CSI 300 and CSOP FTSE China A50 have been relatively strong, given that newly listed HKEx contracts usually take a while to gain traction, say industry players.
On Wednesday, notional value outstanding of the options on China AMC CSI 300 stood at $85.6 million; while those on the CSOP fund stood at $87.4 million.
Thus far, HKEx has only launched four options on ETFs, the others being the popular iShares FTSE A50 (the option on which has been trading for about a year, with current notional value of around $1.25 billion) and the Hong Kong tracker ETF.
High-speed market-makers such as Eclipse Options and Optiver Trading are also market-makers on the four options.
“If you compare these two options with others launched on different stocks in the past, you can see that they have got off a very good start since their launch on January 28,” notes Greg Griffin, director of Eclipse Options in Hong Kong.
He says this demonstrates investors’ renewed interest in China-related ETFs and related derivatives following several rounds of expansion of the renminbi-qualified foreign institutional investor (RQFII) scheme.
Listed derivatives on China ETFs are not new, but their diversity appears to be growing. With the RQFII scheme now allowing Chinese fund houses to issue ETFs using physical A-shares instead of synthetic instruments such as P-notes, in November JP Morgan and Macquarie launched listed warrants on these shares.
Now, with the addition of listed options such as those on the China AMC and CSOP ETFs, banks have an additional way to hedge the risks from selling warrants. In fact, they say trading volumes on warrants, options and the underlying ETFs would often feed into each other, so issuers could potentially see the net asset value of their ETFs benefiting from this symbiotic relationship.
Yowjie Chien, head of warrants trading and marketing for Asia ex-Japan at JP Morgan, says volume of the CSOP FTSE China A50 ETF has increased by up to five times since the bank issued call warrants on it. On Wednesday, 1.02 billion units of the ETF were traded, as the ETF closed at HK$11.52.
Most of the open interest for warrants has been in call warrants (up to 80%), adds Chien, whereas open interest for options has been more evenly spread between both call and put contracts.
Such a distinctive pattern of open interest indicates that investors in warrants tend to be directional players such as retail investors, he notes, whereas those buying options are volatility traders who don’t care so much about whether the underlying ETFs go up or down.
“[The latter group] could be institutional investors such as single-stock trading desks, market-making desks and hedge funds, who are trading more complex volatility embedded in these options,” says Chien.
Whether listed derivatives will appear on other A-share ETFs remains unclear. Not all A-share ETFs enjoy the same amount of liquidity. Some, such as E Fund’s CSI 100 A-Share Index ETF launched in August, was rejected by HKEx.
While the reason for HKEx’s rejection is unclear, it is clear that liquidity remains key for ETFs seeking to have listed derivatives referencing them.
Specialist option market-makers generally decide whether to market-make for a stock or ETF based on its liquidity, Griffin says. He points to the relatively strong trading volume of the China AMC and CSOP ETFs, which prompted his team to also provide liquidity on the options.