It’s not Cheap to bet on More A-Shares Declines

Exchange traded funds tracking Chinese A-shares, the stocks trading on mainland exchanges in Shanghai and Shenzhen, have taken their lumps in recent weeks. Over the past month, five of the 15 worst-performing non-leveraged ETFs are A-shares funds, prompting the price of bearish options, or puts, on some of the funds to surge.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest U.S-listed A-shares ETF, is the U.S.-listed A-shares ETF with the most robust options activity, but traders looking to make bearish bets on ASHR will pay up for the privilege.

“Puts protecting against a 10 percent decline in the Deutsche X-trackers Harvest CSI 300 China A-Shares fund cost 1.8 times the price of calls betting on a 10 percent increase, according to three-month data compiled by Bloomberg. The cost of the bearish options has surged as much as 75 percent in the past three weeks,” reports Belinda Cao for the news agency.

Along with the elevated price of puts on ASHR comes the potential for traders buying those contracts to incur significant losses in short order. Beijing has taken steps to buffer Chinese equity markets against further declines, recently making nearly half a trillion dollars available to prop up mainland shares. Favorable headlines can send A-shares ETFs soaring. For example, ASHR surged 25% in a three-day span earlier this month, punishing traders that were tardy to the bearish A-shares party. [Shorts Burned by A-Shares Rally]

Additionally, short interest in ASHR was elevated earlier this month, indicating that another large, unexpected upside move in the ETF could force a round of significant short-covering. Short interest in ASHR “accounted for 19 percent of shares outstanding, after tripling from a month earlier, data compiled by Bloomberg and Markit Group Ltd. show,” according to Bloomberg.