STRANGLING CHINESE VOLATILITY

Chinese GDP Prints this evening. Traders with an appetite for risk might look at the options market

 

The Chinese Bureau of Statistics releases Q1 GDP tonight, and NBS spokesman Li Xiaochao will be hosting a press conference at 10am Beijing time to announce the data. In the wake of the comments made by the Premier over the weekend while he was attending the aborted ASEAN summit in Bangkok, expectations are running high despite all of the obvious negative data points for exports and production which have arrived in recent months. 

 

Our preferred ETF vehicle for China, CAF, does not have option available. FXI, which has significant Hong Kong exposure, does have options and as such I am looking at it as a (somewhat flawed) volatility surrogate. Despite structural flaws, the volatility levels implied FXI options may be appealing to speculators.

 

Chinese indices have had significantly higher realized volatility Than US equivalents recently:

 

STRANGLING CHINESE VOLATILITY  - bbbabbber


Specifically looking at options expiring this Friday, with FXI at 32.95 traders may find the Apr. 33 strike Calls and Apr. 32 Strike Puts an attractive (if risky way) to capture any major move above 34 or below 31 driven by tonight’s data.

 

The VIX, at 32.7, is only 7.3 % higher than 30 day realized on the SPY, while at-the-money SPY calls expiring this Friday are trading at implied volatility levels more than 10 % higher. Meanwhile at 54.8 for the April 33 Strike calls and 56.05 April 32 strike Puts –the implied volatility for FXI options is actually below  both the 30 & 90 day realized vol level (obviously skewed by liquidity etc) and also below the realized 90 day vol level of the underlying index. For those looking to capture a really big surprise, this is probably the place that you want to play.

 

Critically the term structure of implied volatility is nearly flat, meaning that the May contracts although more expensive on an absolute dollar basis, are equally attractive for more conservative traders.

 

So far trader expectations appear to be split evenly with the ratio of Calls to Puts at 45459 vs. 43809 so far today. We do NOT have an inside track on what the numbers released tonight will look like, nor do we have a firm forecast based on our work –although we remain very bullish on the Chinese ox. 

 

For those brave souls who want to take a swing,  we salute you.

 

Andrew Barber
Director


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