Tencent Stock Options Cost a Fortune and Traders Love Them

(Bloomberg) — Caught off guard by Tencent Holdings Ltd.’s record-breaking rally earlier this year, Hong Kong’s stock investors are getting well prepared for the next one.


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For about two months, options traders have consistently shelled out more for bullish three-month contracts on the stock than they’re willing to pay for those protecting against losses, according to data compiled by Bloomberg. That’s kept Tencent’s so-called volatility skew below zero, an unusual quirk for a market that typically sees traders pay more for downside protection than upside speculation.

There are now almost 1.1 million outstanding options on Tencent, outnumbering those on the Hang Seng Index by more than 4-to-1. The demand for the derivatives mirrors a trend in the U.S., where volume in single-stock options exploded this year and helped underpin the rally in technology shares.

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The world’s eighth most valuable stock is growing revenue at its fastest pace in years, lifted by an explosion in internet activity — and mobile gaming in particular — amid China’s world-leading recovery from Covid-19. The 33% stock surge in the first half of this year plateaued after U.S. President Donald Trump signed an executive order banning U.S. entities from dealing with Tencent’s signature app WeChat.

chart: Tencent's call options are pricier than puts

© Bloomberg
Tencent’s call options are pricier than puts

Tencent has long been a market favorite because of its dominant position in China’s gaming sphere and the ubiquity of WeChat, which has become the go-to app for communications, social media and entertainment. While Alibaba Group Holding Ltd. and upstarts like ByteDance Ltd. are challenging its position, Tencent continues to serve the country’s largest user base and dominate in gaming, the most profitable class of smartphone app.

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The company is set to report third quarter results on Nov. 12. Its net income is expected to grow 45% following a prior-year decline, with revenue projected to rise 28% from a year earlier, according to the consensus estimates of analysts tracked by Bloomberg. The stock has the most buy recommendations among all companies listed only in Hong Kong and no analyst has a sell rating on Tencent.

Nine of the firm’s 10 most-owned options contracts are bullish, including one that bets Tencent shares will reach HK$660 by the end of the year. That implies a gain of 25% from Tuesday’s close of trading.

(Updates with details in 3rd paragraph)

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