Don't fight the tape. This continues to define how equity and options investors should approach China's volatile stock market.
The Chinese stock market fell sharply Monday, spurred by weak economic data , creating opportunities to wager on further declines.
American investors can consider buying bearish short-term puts on the Deutsche X-Trackers Harvest CSI 300 China A-Shares Fund (ticker: ASHR ). The exchange-traded fund is a proxy for mainland China stocks.
With ASHR at $31.79, down some 4.4%, investors can buy ASHR's September $ 31.50 put that expires Friday (Sept. 18) for 85 cents.
If ASHR is at $30, the put is worth $ 1.50. Should ASHR never decline below the $31.50 strike price, the money spent on the put is lost.
In the past, we have advised investors to consider buying weekly ASHR puts in anticipation mainland China&# 39;s stocks will remain susceptible to sharp declines and high volatility.
Our last weekly put trade was profitable if investors quickly realized gains. The September $ 29 put was recommended on a Monday at 20 cents. On Tuesday, the put traded around 50 cents, though it expired for a nickel. The lesson: Take profits when you have them.
The weekly put trade expresses a view China's stock markets are hostage to two powerful realities.
Investors are afraid China's economy is slowing, or has slowed, below the government's 7% goal.
Some investors contend China's central bank must unveil a massive program to stimulate the economy and financial market even though the People's Bank of China has four times lowered interest rates since November. Still, investors remain leery, pointing to one of the worst maladies that can befall economic and financial enterprises: a crisis of confidence.
While our investment thesis on China has remained constant since late July , our approach has evolved along with the facts. In July, we recommended buying an ASHR October $40 put. The position surged in value. We realized profits and “rolled down” to ASHR 's October $ 30 put. Since China's markets remained erratic, and we saw little opportunity to trade individual equities, we recommended trying to optimize the October $30 put with weekly puts.
In totality, our focus is firmly fixed on October. We believe China 's financial markets face an important event little understood by most investors.
In early October, usually after the national Golden Week holiday , the 18th Communist Party of China Central Committee will hold its fifth plenary session in Beijing. The meeting is expected to produce a national development plan for 2016 to 2020.
While these sessions traditionally have not been market events, this year's plenary could have added significance. It occurs during a financial crisis that has many investors questioning the effectiveness of China 's leadership. If the plenum fails to assuage concerns about China's economic growth, the plenum could suddenly become a tradable event, which could further pressure already fragile Chinese stocks.
Until the plenum's outcome is known, we expect China's stock market will remain under pressure. Should China's leaders evolve their approach, we shall evolve ours.