Popcorn's Popping in China
Chinese New Year Rally....
In our first Traders Talk and newsletter of the year, we highlighted that China should be popping before Chinese New Year which is on 22 January. In fact, way before back in early December we were already lining up China plays in counters such as JD and BABA. We shared all these through Traders Talk, our Newsletters, Facebook and also TikTok. For those who took note, would have gotten very nice profits when China popped last Wednesday with BABA bringing the rest of the China counters up.
Today, the popcorn machine continued popping with BABA up again by another 8% today. We took some profits off some of our positions while continuing some low risk trade to continue accumulating profits.
What Strategy?
Most China stocks has retraced at least 60-70% if not more due to the strict rulings and anti monopolistic sections against big tech companies in the past years and covid restrictions and lockdown imposed on the Country as a whole. We have seen increasingly in the past 6 months the strict rulings on big tech starts to unwind and become clearer of its policy directions. Coupled with the pressures to remove the covid lockdown restrictions by the masses through protest etc have caused the government to reconsider its strict lockdown stance and finally decision to openup the country with less quarantine restrictions to inbound traveller. These factors have reduced the downside risk significantly and increase upside potential enormously.
As such, the kind of options strategies which we have used are those which have high delta effects, such as straight calls and naked puts.
Nevertheless, there is no trade which comes without risk and to mitigate any potential downside and manage time decays, we have use short puts to get the discount buffers in case stock price goes further down or if the push in price up takes longer than expected, our call premiums will decay. To achieve this we structured the following Option Strategy.
Buy ATM Call
Fully finance the ATM Call with 2 Naked Puts
Rationale?
The ATM Call gives us 50 Delta on entry. Any price movement up, we get to enjoy the premium increase immediately.
2 Naked Puts instead of 1 ATM short put? If we do 2 naked puts, the strike price we choose is lower than existing stock price. We can run down a strike discount of at least 8-10% from current stock price. That will give us a buffer in case stock price comes down, we can still manage to get out of the trade on these strikes OTM on expiry, cancelling off all premiums received with the price paid for long calls. In addition, if price does not move up immediately, the theta decay in short puts will offset the theta decay in the long call.
As the China stock price have gone down already by 70-80%, further downside may be less likely or with lower risk, coupled with the new positive data outflows in China, chances of downside risk outweighs upside potential.
The trade duration, we did was 3 months expiry March 23, which also gives us time to become right.
Example of trade, check out our Traders Talk (34.55) or Tiktok below.
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More Opportunities Ahead?
Obviously more potential for China plays than US plays to the upside. However, wait for retracements before going down. There is no point to chase trade when the first round traders are looking to exit with this round of upmoves.
If price of BABA retraces and we can structure the above trade with 2 85 strike short puts financing an ATM call, minimum 60 days though 90 days would be optimum. As support will be at 85, any entries below this level would be kind of safe, though there is always no 100% guarantee as the CCP is kind of unpredictable.
Other counters would of course be JD.com. JD only participated with the first rally last Wednesday and retraced thereafter. If it continues to slide this week, we can reenter a trade on JD. 50-55 strike would be the optimum safe strike levels for the 2 short put financing the long call to achieve more or less zero cost entries. If you do not mind to pay a little debit to be safer, you can go down a bit more on the short put strikes.
Our current running trades are at strikes between 45-47.5 for the short put strikes.
Other China stocks, plenty but we are only trading those which are more liquid and familiar to us and with a bit of fundamentals, ie. profitable companies. Baidu may also be a good candidate but be careful on this stock as the price fluctuations are quite big for this stock.
DISCLAIMER
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.
Hong Kong markets opened today after Chinese New Year. HSI gapped up +1%+ on opening. Has moved up 50% since bottoming out end Oct 22. HSI Futures (HSI) & HS Tech (HSTECH) Index options call spreads expiring Jan, fully decayed. Feb almost there and March 50%-60% decayed. Wait for some retracements to reload March-April spreads, if it ever comes :)