​HSCEI Dips Below 9,000, Exo Vol Buying Imminent, Corridor Var Interest Spikes

The crash in China’s stock markets on Thursday morning and the subsequent halt in trading on Shanghai and Shenzhen stock exchanges sent HSCEI spot spiraling downwards below 9,000, a key level that will likely drive exotic books to buy back vols to hedge their autocallables at a rapid rate. Long-dated volatilities in the HSCEI have so far only seen minor increases, while some hedge funds this week have been buying downside long-dated puts in order to play the theme. Flow has been fairly muted as of Thursday afternoon in Hong Kong, with some interest in low strike call spreads and straddles on HSCEI from hedge funds. Elsewhere this week, hedge funds have also been active in buying corridor variance swaps in the HSCEI/HSI, variance swap selling in short-term maturities and contingent options.