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Unlikely winners from Hong Kong's market crash: retail investors

[HONG KONG] Not everyone is weeping after Thursday's stock selloff.

Hong Kong retail investors who trade callable bull/bear contracts (CBBS) actually made a profit overall. Despite steady recent inflows into derivatives betting that the benchmark Hang Seng Index and Tencent Holdings Ltd would rebound, their holdings of bearish contracts were enough to weather the losses.

On the Hang Seng Index, CBBCs investors made about HK$480 million (S$84.2 million) from bear contracts on Thursday, exceeding the HK$200 million loss incurred by their bull versions, according to Dick Chau, director for UBS Group AG's equity-derivatives sales in Asia.

On Tencent, they might have generated a HK$61 million profit from the bear contracts, offsetting the HK$28 million lost on the bullish ones, Mr Chau wrote. He based his calculations on contracts outstanding as at Oct 10, taking into account which ones got knocked out during Thursday's rout.

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"People might think CBBC investors suffered from the market drop and knock-outs of Tencent and HSI bulls, but actually they made money," Mr Chau said. "It's the nature of these products - limited losses and unlimited upside."

CBBCs are structured products favoured by retail investors. Those on the Hang Seng Index and Tencent are the most popular in terms of value traded.

The Hang Seng Index sank 3.5 per cent on Thursday in its biggest plunge since February as almost US$200 billion of value was erased from equities traded in Hong Kong. Tencent, still the most valuable Asian stock despite its spectacular plunge since January, slid 6.8 per cent to extend a record losing streak into a 10th day.

BLOOMBERG

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