(Bloomberg) -- Traders who scooped up millions of shares worth of bullish options over the past week in tiny, levered exchange-traded funds tracking Chinese indexes are up more than $130 million on paper as shares surged after top leaders in Beijing signaled stronger economic support next year.
The options buying was centered on two ETFs — Direxion Daily FTSE China Bull 3x Shares (ticker YINN) and Direxion Daily CSI 300 China A Shares Bull 2x Shares (ticker CHAU). Their combined market capitalization of around $2.5 billion lags larger funds like iShares China Large Cap (ticker FXI), which has almost $8 billion.
Starting Nov. 29 and continuing through last week, a trader or traders snapped up almost 180,000 of the January 2026 $27 calls in YINN for an average price of around $9.35 each. And on Dec. 2, about 210,000 of the May $15 calls in CHAU were bought for about $2.64 each.
Together, that’s about $225 million in premium, though likely the actual outlay was less using margin. With the contracts worth $15.40 and $4.02, respectively, in early trading Monday, the buyers have about a $138 million paper gain, based on Bloomberg calculations.
The trades didn’t appear to be part of spreads or immediately hedged with shares, which would change the amount of potential profit. Open interest has held steady or risen in both contracts since the trades, signaling the positions are being held.
Chinese stocks surged in Asia trading and US-listed depositary receipts and ETFs followed suit after President Xi Jinping’s decision-making Politburo vowed to embrace a “moderately loose” monetary policy in 2025, according to the official Xinhua News Agency, signaling more interest-rate cuts ahead and a shift away from a “prudent” strategy that’s held for nearly 14 years. CHAU jumped 15% and YINN soared 27% Monday.
Evercore ISI strategist Neo Wang said that China’s Politburo this time offered unprecedented “supportive guidance for the economy in 2025,” rekindling enthusiasm for China assets. Announcements of strong fiscal support are now expected in the annual NPC meeting in early March, Wang said. “It will Likely include higher deficit ratio, bigger local government special bond quota, and at least 1 trillion yuan of ultra-long special sovereign bonds.”
The size of the trades was unusual for the small ETFs, as was the tenor of the options bought. Before Dec. 2, the 20-day average options volume on CHAU was just 6,150 contracts, and on YINN about 34,000. While speculative bets are often done in shorter-term contracts, the buying of later-dated options may signal a wager that the stimulus will be parceled out well into 2025.
By buying leveraged ETFs, “you get higher risks and higher rewards, and more bang for your buck,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group.
It’s surprising that there’s only limited profit taking today after the big move, suggesting investors are looking for more positive stimulus announcements from Beijing, he said.
“We had a big move and people are looking for more.”
--With assistance from Yiqin Shen and Ye Xie.
(Updates with comment from Susquehanna strategist in final paragraphs)
©2024 Bloomberg L.P.