Tencent Derivatives Go Wild as Bearish Options Surge 34,900%

(Bloomberg) -- Tencent Holdings Ltd.’s biggest two-day slump since 2011 has taken Hong Kong’s derivatives market by surprise, handing a windfall to traders who placed long-shot wagers on a selloff.

Bearish bets on Tencent accounted for all five of the biggest gains among Hong Kong-listed options on Friday, with one contract surging as much as 34,900 percent. Several bullish Tencent options lost most of their value, following the tech giant’s disappointing earnings report and disclosure that Naspers Ltd., its biggest investor, had sold $9.8 billion of shares at a discount.

While options often record large swings as month-end expiry dates approach, the outsize moves in Tencent contracts suggest traders weren’t anticipating anything close to back-to-back declines of more than 5 percent in Hong Kong’s biggest company by market value. Daily swings in the stock have averaged 1.4 percent over the past 12 months.

"Many traders were caught off guard," said Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong. “Institutional investors who can’t sell Tencent, they’re having to have to buy puts to hedge. It’s 10 percent of many long-only portfolios.”

Tencent options accounted for seven of the 10 most-traded contracts in Hong Kong on Friday. It was also among the most active bets in Hong Kong’s warrants market, which is popular among individual investors.

©2018 Bloomberg L.P.