Barron's - USA (2021-07-12)

July 12, 2021 BARRON’S M5

THE STRIKING PRICE

The increased bellicosity of China’s government

makes investing in China at this time so perilous

that it may no longer make sensefor most people.

China Is Getting Too

Risky. How to Play It Safe.

O

ne of the most useful insights

into successful investing is to be

greedy when others are fearful

and fearful when others are

greedy. Xi Jinping seems determined to

disprove the axiom.

China’s leader has targeted many leading

technology companies in what appears to be,

at a minimum, an effort to control data on

Chinese citizens at home and perhaps also

abroad. The moves are also rough reminders

to China’s increasingly high-profile techno-

crats that Xi is more powerful than anyone.

Until recently, China’s government

seemed content to smack around compa-

nies, but a new regulatory era seems to

have begun—and investors are reacting

to this differently than in the past.

China’s recent punitive actions have

historically attracted steely investors who

used bullish stock and options strategies

in anticipation that the stocks would soon

rally higher. But not this time. So far, the

truly notable trades are protective strate-

gies that would increase in value if Chinese

stocks continue to decline.

Earlier this week, an investor adjusted

an existing position in the iShares China

Large-Cap exchange-traded fund (ticker:

FXI) by taking profits on 5,000 August $46

put options and buying 10,000 August $43

puts for a 75-cent credit. The ETF was re-

cently around $44. Similar trading occurred

in the KraneShares CSI China Internet

ETF (KWEB), when an investor rolled

20,000 July $64 puts to July $60 puts. An-

other investor bought 10,000 July $60 puts.

The ETF was recently around $62.

Consider what has happened to DiDi

Global (DIDI). The ride-hailing app just

went public on the New York Stock Ex-

change. The June 30 $4.4 billion offering

was one of the largest of the year, demon-

strating the interest that investors have in

Chinese tech companies. Goldman Sachs,

Morgan Stanley, and JPMorgan were lead

underwriters. Investors were excited. The

deal size was increased to 316.8 million

shares from 288 million.

But two days after the initial public of-

fering, China’s Cyberspace Administration

began probing DiDi over data-security con-

cerns. The government ordered Chinese

app stores to remove DiDi, and DiDi’s stock

price collapsed. Two other U.S.-listed Chi-

nese companies— Full Truck Alliance

(YMM), a truck-hailing app, and Kanzhun

(BZ), an online recruiting platform—were

hit in a similar probe.

Though we have long advised patient

investors to take advantage of weak share

prices on major China stocks, the increased

bellicosity of China’s government toward

many of the nation’s top companies—

especially those that collect data on peo-

ple—makes investing in China at this time

so perilous that it may no longer make

sense for most people.

Existing positions can be managed by

simply selling upside call options that expire

in a month or so and that are, say, 5% or so

above the associated stock prices. This over-

writing strategy will help investors get paid

to wait for a recovery, should one come.

With DiDi at $12.03, for instance, the

August $12.50 call could be sold for about

$1.35. The trade is small solace to anyone

who bought into the excitement of the IPO,

but it offers a way for shareholders to po-

tentially enhance returns while waiting for

better days.

Establishing new positions in China’s

tech stocks is likely to prove too risky until

it becomes possible to assess what the gov-

ernment might do next to exert control over

the sector.

The rise of China’s middle class remains

one of the greatest economic events we are

likely see in our lifetimes, but Xi is proving

to be an unreliable counterparty.B

Steven M. Sears is the president and chief oper-

ating officer of Options Solutions, a specialized

asset-management firm. Neither he nor the firm

has a position in the options or underlying securi-

ties mentioned in this column.

By Steven M. Sears

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

15

25

35

45

ASOND JFMAMJ J

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

40

60

80

100

120

140

ASOND JFMAMJ J

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

9

10

11

12

13

14

15

16%

ASOND JFMAMJ J

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

7

8

9

10

11

12%

ASOND JFMAMJ J

Source: Credit Suisse Equity Derivatives Strategy

Skew indicates whether the options market expects a stock-market advance or decline. It measures the difference

between the implied volatility of puts and calls that are 10% out of the money and expire in three months. Higher

readings are bearish.

Week'sMostActive

Company Symbol TotVol Calls Puts AvgTotVol IV%ile Ratio

OncoSec Medical ONCS 19683 17192 2491 52 88 378.5

Shenandoah Telecom SHEN 13334 8600 4734 140 76 95.2

Iveric Bio ISEE^2034919196115333289 61.3

PFSWeb PFSW 4901 3300 1601 112 43 43.8

Alector ALEC 39142 17006 22136 1608 75 24.3

Ocean Power Technologies OPTT^73877708583019430063 17.2

Sinclair Broadcast SBGI^1794917244705133653 13.4

News NWSA 15129 6593 8536 1368 40 11.1

Frontier Communications FYBR 6927 5640 1287 652 41 10.6

SMART Global SGH^27012202846728328029 8.2

Sohu.com SOHU 14598 14064 534 1960 52 7.4

WD-40 Company WDFC 5327 2741 2586 748 64 7.1

Weibo WB^601273844121686854471 7.0

Astra Space ASTR 148783 128755 20028 21680 100 6.9

Chindata CD 21846 21596 250 3272 13 6.7

Bsquare BSQR^166666121341453252874886 5.8

9 Meters Biopharma NMTR 44044 40105 3939 7792 38 5.7

Freightcar America RAIL 40276 38145 2131 7136 100 5.6

KE BEKE 112996 17721 95275 20744 43 5.4

Melco Resorts & Entertainment MLCO^162112148038140743096450 5.2

Thistableofthemostactiveoptionsthisweek,ascomparedto average weeklyactivity–notjustrawvolume.Theideaisthatthe

unusuallyheavytradingintheseoptionsmightbeapredictorofcorporateactivity–takeovers,earningssurprises,earningspre-

announcements,biotechFDAhearingsordrugtrialresultannouncements,andsoforth.Dividendarbitragehasbeeneliminated.In

short,thislistattemptstoidentifywhereheavyspeculationistakingplace. Theseoptionsarelikelytobeexpensiveincomparisonto

theirusualpricinglevels.Furthermore,manyofthesesituationsmayberumor-driven.Mostrumorsdonotprovetobetrue,soone

shouldbeawareoftheseincreasedrisksiftradinginthesenames

RatioistheTotVoldividedbyAvgTotVol.IV%ile ishowexpensivetheoptionsareonascalefrom0to100.

Source:McMillanAnalysis