China Assets Surge: How to Short Using a Bear Call Spread

Chinese Stocks Show Strong Performance on Thursday

The Nasdaq Golden Dragon China Index rose 3.5%, with notable gains among major Chinese stocks: XPeng surged 15.61%, Bilibili gained 8.89%, JD.com rose 6.62%, NIO climbed 6.20%, KE Holdings was up 4.49%, Pinduoduo gained 4.40%, and Alibaba rose 3.53%.

Similarly, China-focused ETFs also performed robustly: the Direxion Daily FTSE China Bull 3X ETF (YINN) closed up 16.19%, the ProShares Ultra FTSE China 50 (CHAU) gained 11.22%, the Invesco China Small Cap ETF (CNXT) rose 7.78%, and the Invesco China Technology ETF (CQQQ) increased by 6.05%.

Zhou Wenjun, General Manager and Chief Investment Officer at Morgan Stanley Fund Management (China) Co., Ltd., stated that the Chinese asset management industry has immense scale and potential, with substantial growth opportunities. Florian Neto, Managing Director and Head of Investments for Asia at Amundi Asset Management, remarked that while the Chinese market is often treated as a tactical allocation market, overly focusing on tactical moves can result in missing out on uptrends. Looking forward, he expects reduced volatility in the Chinese market, saying, "Given future return projections, Chinese assets continue to grow, and now is an excellent time for allocation."

To navigate the market’s volatility, investors may also consider using options strategies such as the bear call spread to short positions.

What is a Bear Call Spread Strategy?

A bear call spread is an options strategy used when an options trader expects the underlying asset’s price to fall. Traders use this strategy to short the asset while keeping the risk within a limited range.

In this strategy, the trader buys call options at a specific strike price and sells the same number of call options with a lower strike price and identical expiration date.

Example: Shorting YINN Using a Bear Call Spread

For example, suppose an investor wants to short YINN, which is currently priced at $39.57, anticipating it will drop to around $30 by December 20. The investor could use a bear call spread to short YINN.

1. Step One: Sell a call option expiring on December 20, with a strike price of $30, to receive a premium of $1,090.

   

   Step Two: Buy a call option with the same expiration date, with a strike price of $40, paying a premium of $540, thereby completing the bear call spread.

   

   • Sell Call Option: Strike price of $30, December 20 expiration, premium of $1,090.

   • Buy Call Option: Strike price of $40, December 20 expiration, premium of $540.

   Net Premium Income: Total premium income = $1,090 - $540 = $550.

   Maximum Profit: By expiration, if YINN’s price is $30 or lower, both the sold and bought call options will expire worthless. In this case, you retain the net premium income of $550 as maximum profit.

   Maximum Loss: If YINN’s price is $40 or higher:

   • The loss from the sold $30 call option = (40 - 30) × 100 = $1,000.

   • After deducting the net premium income, the maximum loss is $1,000 - $550 = $450.

   Breakeven Point: Breakeven point = $30 + $5.5 = $35.5. Thus:

   • If YINN is at $35.5, you neither gain nor lose.

   • When YINN’s price is above $35.5, the strategy incurs a loss; below $35.5, it generates a profit.

   Summary:

   • Maximum Profit: $550 (if YINN ≤ $30).

   • Maximum Loss: $450 (if YINN ≥ $40).

   • Breakeven Point: $35.5.

This bear call spread profits if YINN falls to $30 or below, and incurs maximum loss if the price rises to $40 or higher.

The primary advantage of a bear call spread is its reduced risk compared to short selling; buying a higher strike call option mitigates the risk of selling a lower strike call. This makes the bear call spread less risky than directly shorting the stock, which has theoretically unlimited risk if the stock price increases.