Chinese equities have emerged as some of the world’s best performers this year, and according to Bank of America Corp.’s top options strategist, Lars Naeckter, there’s still room for growth. Naeckter, who previously predicted significant gains in the Chinese stock market, is now confident that the rally could extend further. The market has responded positively to China’s efforts to revitalize its economy, and many investors are positioning themselves for potential further gains, showing a strong demand for bullish bets.
Lars Naeckter, the head of Asia Pacific equity derivatives research at Bank of America, highlighted a significant increase in demand for call options—financial contracts that allow the buyer to purchase an asset at a specified price—on Chinese equities. This surge in demand comes as China implements a series of stimulus measures aimed at propping up its economy. Call options on Chinese stocks listed in Hong Kong, as well as on the US-traded iShares China Large-Cap ETF, have seen a sharp increase, with the cost of these contracts compared to puts (which offer the right to sell) reaching levels not seen since 2008.
This shift in market sentiment follows the Chinese government’s introduction of initiatives designed to stabilize its economy, which has faced challenges ranging from weak domestic demand to global trade tensions. Despite some skepticism around the effectiveness of these measures, investors are beginning to bet on a sustained recovery in Chinese equities. Naeckter pointed out that, while the Hang Seng China Enterprises Index—a key benchmark for Chinese stocks traded in Hong Kong—has surrendered almost half of its recent gains, the market remains poised for further growth.
China’s economic policy pivot has been central to this newfound optimism. Over the past few months, Beijing has rolled out a series of fiscal and monetary measures aimed at boosting economic growth. These include interest rate cuts, tax breaks, and increased infrastructure spending. Additionally, the government has signaled a willingness to support industries critical to the country’s long-term development, such as technology and renewable energy, which has further encouraged investor confidence.
Naeckter emphasized that investors’ appetite for re-entering the Chinese stock market is growing, and opportunities for further upside remain. He referenced a bullish options strategy he recommended in early September, which has since delivered returns of over 360%. At the time, the Hang Seng Enterprises Index was trading near a low, and those who followed Naeckter’s advice saw significant gains as the index climbed in early trading on Friday.
“The opportunities are still there,” Naeckter said in an interview conducted in Hong Kong earlier this week. “There’s significant upside potential for this market from here, as we balance the uncertainty with the ongoing stimulus measures in terms of scope and timing.”
Bank of America is not alone in its optimistic outlook on Chinese stocks. Goldman Sachs Group Inc. also believes the rally in Chinese equities may have legs. In a recent recommendation, Goldman’s trading desk suggested strategies like call spreads and collars to take advantage of elevated implied volatility. These options strategies allow traders to capture gains from rising stock prices while hedging against potential declines.
Specifically, Goldman Sachs recommended Hang Seng Enterprises call spreads—a strategy that involves buying one call option and selling another at a higher strike price to lower the overall cost of the trade. They also advised investors to use collars, a strategy in which investors buy put options (for downside protection) while selling call options (to finance the trade). This approach allows investors to profit from continued gains in Chinese stocks while managing the risks associated with market volatility.
Bank of America also advised clients to roll over their bullish options positions from September into November and December, using calendar call spread collars. These positions will cover the period leading up to the US presidential election, with the firm expecting market volatility to remain elevated until then, before subsiding after the election.
In addition to these strategies, Naeckter’s team has been recommending bullish options trades on the US-listed iShares China Large-Cap ETF. This exchange-traded fund (ETF) is popular among US investors looking to gain exposure to Chinese companies.
One major factor that continues to weigh on the outlook for Chinese equities is the ongoing uncertainty surrounding US-China relations. While tensions between the two economic superpowers have been a key focus for investors over the past few years, Naeckter believes the more significant issue at the moment is Chinese policy.
“There is going to be continued noise between the US and China and the ongoing uncertainty around that,” Naeckter said. “However, for market participants, the bigger elephant in the room is Chinese policy and the meetings that are coming up.”
Indeed, investors are eagerly awaiting the upcoming meeting of China’s National People’s Congress Standing Committee, where important decisions on fiscal spending and bond issuance are expected to be made. Any additional budget approvals or increases in the country’s bond quota would be key signals of the government’s willingness to deploy more aggressive fiscal measures to support the economy.
Chinese equities have experienced a turbulent ride in recent months. After a steep decline in early September, stocks rebounded sharply following the government’s stimulus announcements. However, the initial wave of optimism has since cooled, as investors await more concrete details on the government’s spending plans.
Skepticism is growing among market participants as Beijing appears to be taking its time in finalizing its fiscal strategy. Some analysts are concerned that the government may not be willing—or able—to deploy the level of firepower needed to turn the economy around and sustain the recent rally in the stock market.
At a derivatives trading forum held in Hong Kong earlier this week, Peter Yip, head of currencies and emerging markets at JPMorgan Chase Bank, pointed out that demand for hedges against further declines in Chinese stocks has increased. Yip cited several factors contributing to investor caution, including uncertainty around China’s stimulus plans, the global interest-rate environment, and the upcoming US presidential election.
One of the key concerns for investors is avoiding a repeat of the boom-and-bust episode seen in Chinese stocks in 2015. That year, Chinese equities skyrocketed to a seven-year high, driven by speculative trading and government policies aimed at boosting market liquidity. However, the rally proved to be unsustainable, as stock prices eventually collapsed, leaving many investors with significant losses.
Naeckter warned that while there is optimism surrounding the current rally, the market must remain grounded in economic fundamentals to avoid a similar fate. “There remains a healthy dose of skepticism, which is good in the sense that we may not get an overshoot on the upside,” he said.
While Chinese stocks have seen impressive gains in recent months, much will depend on the government’s willingness to follow through with additional stimulus measures and its ability to manage investor expectations.
As China navigates its economic recovery, the outlook for its equity markets remains mixed. On one hand, the government’s stimulus measures have sparked a wave of optimism among investors, and the demand for bullish options strategies suggests that many are positioning for further gains. On the other hand, concerns about the sustainability of the rally and the risks posed by external factors—such as US-China relations and the global interest-rate environment—are keeping some market participants cautious.
