To The Moon

With eager anticipation, the Fed has kicked off its rate-cutting cycle, surprising the market by cutting rates by 50 basis points, lowering the federal funds rate to 4.75%-5%.

On September 19, U.S.-listed Chinese stocks soared, with the $NASDAQ Golden Dragon China Index(HXC)$ rising 4.15%.

$XPeng Inc.(XPEV)$ surged over 8%, $NIO Inc.(NIO)$ jumped over 7%, and $JD.com(JD)$ and $Bilibili Inc.(BILI)$ gained more than 6%.

$Tencent Music(TME)$ , $Alibaba(BABA)$ $Vipshop(VIPS)$ were up over 4%, while $iQiyi Inc.(IQ)$ $FULL TRUCK ALLIANC SPON ADS EACH REP 20 ORD SHS CL A(YMM)$ $NetEase(NTES)$ $Weibo(WB)$ rose over 3%. $Baidu(BIDU)$ $Li Auto(LI)$ $PDD Holdings Inc(PDD)$ also saw gains, with increases of over 2% and 1%, respectively.

This rally in Chinese stocks isn’t random, historical data shows that rate cuts benefit a range of Chinese assets.

Four Key Trends

Analyzing six rate-cut cycles since the 1990s reveals some trends:

1.In the month following a rate cut, both Hong Kong and A-shares generally post positive returns, with Hong Kong showing more volatility, while A-shares gain less. However, the Shanghai index typically dips after 3-6 months, while the $HSI(HSI)$ ’s gains drop to single digits but remain positive;

2. In the first month post-cut, growth stocks outperform value stocks, and small caps outperform large caps, but after 6 months, large caps catch up and value stocks have a higher win rate;

3.Except for essentials and energy, most A-share sectors decline post-cut, while most Hong Kong sectors rise, particularly Telecom (+11.5%) and IT (+10.1%);

4.Local Hong Kong stocks initially lag behind Chinese stocks after a cut but maintain positive returns, while the $HSCEI(HSCEI)$ turns negative after 3 months.

Given the anticipated performance of Chinese assets post-rate cut, investors can utilize options strategies in the U.S. market, such as $KraneShares CSI China Internet ETF(KWEB)$ , to capitalize on this trend. A bull call spread strategy may be a strong choice based on KWEB's historical performance.

What is a Bull Call Spread Strategy?

A Bull Call Spread strategy involves buying a call option with a lower strike price while simultaneously selling a call option with a higher strike price, both with the same expiration date.

Compared to simply buying a call, this approach generates extra premium income, reducing the net premium outlay and shifting the breakeven point to the left, which increases the probability of success. Essentially, it's a low-cost way to buy call options.

This strategy is ideal for investors who believe the underlying asset will rise moderately but not dramatically. It works best in a market with low expected volatility, allowing profits through reduced option costs.

KWEB Bull Call Spread Example

KWEB is currently priced at $26.96. An investor can:

Step 1: Buy a call option with a strike price of $27, expiring on October 18, for a cost of $81.

Step 2: Sell a call option with a strike price of $30, with the same expiration date, for a premium of $12.

1.Cost Breakdown

- Cost of buying the $27 call: $81

- Premium from selling the $30 call: $12

- Net cost: $81 - $12 = $69

2.Profit and Loss Scenario

- Maximum Profit: When the asset price is at or above $30 at expiration. The maximum profit comes from the difference in strike prices, which is $3 (30 - 27). Since each option contract represents 100 shares, the total profit would be $3 × 100 = $300. Thus, the maximum profit = $300 - $69 = $231.

- Maximum Loss: This equals the net cost, as the investor won't exercise the $27 call if KWEB's price is below $27 at expiration. So, the maximum loss = $69.

- Breakeven Point: The breakeven occurs when the asset price equals the strike price plus the net cost. Breakeven = $27 + ($69 / 100) = $27.69.

This strategy helps investors capitalize on moderate price increases while limiting risk.