China's Stimulus Creates Huge Bullish Option Trades

China recently announced changes to their monetary policy, including mortgage rate adjustments and other stimuli which has since created strong flows into Chinese stocks.

What is notable to me as the head of the Benzinga Option School is how the inflows being driven aren't primarily short term (i.e. expiring this Friday). In fact, the lions share of flows are further out in time, which tells me that a) this isn't purely short-term speculatory flows, and b) traders are willing to hold risk over time in Chinese stocks.

Of note in this group is $BABA which is enjoying strong equity inflows today (29M shares today vs 19.9M which is the 30 day average). Hence, real money macro players are willing to put on risk, and in good size in the Chinese tech stock.

On top of this, only 26% of the call deltas on the day are expiring this Friday.

This means the options market isn't dominated by short term players, but option traders willing to hold long calls over time.

Here's how my PFP system tells me we can take advantage of this.

According to my PFP system, all that means the flows are solidly net bullish on the day. Looking at the price action (other ‘P' in the PFP system) in the 5min chart below, we can see a solid ICICI structure (I = impulsive, C = corrective) that is solidly bullish, pushing back into the ITD highs as we speak.

5 min chart $BABA

This means the second variable in my PFP system (price action) is also bullish on the day. As for institutional positioning for the day, that's where it gets interesting.

The TCS (top call strike) is at 110, which normally would limit the upside potential short term and offer up resistance. However, there is infrastructure (i.e. positioning) at the 115 and 120 strikes. These are for October 4^th and October 18^th (monthly options expiration), the largest out-of-the-money (OTM) open interest (OI) strikes on the board.  Also of note is the OI at these strikes over time is comparable to the TCS 110 strike.

What this translates to is that there are bullish option traders with decent size targeting the 115 and 120 strikes not just for this Friday, but for the October op-ex as well. While the latter 120 strike might be hard to achieve this week, it becomes much more plausible for the October op-ex.

One last note about the 120 strike I have to mention is that on the weekly chart, you can see long-term major resistance there going back to 23' and 22', hence this would be a natural place for bullish traders to take profit.

$BABA Weekly chart

Thus, bullish traders may want to look for October op-ex long calls at either strike, or look at doing a bull call spread for the October op-ex. Beyond 120, bullish call flow diminish extensively, so based upon current positioning, I'd expect some consolidation should we hit 120 in the upcoming sessions.

For now, if $BABA can close above 110 and build new bullish positioning and positive gamma above here, we could see 110 becoming support for the next leg up. If, however, it pulls back below 110, then I'd look towards 105 and 100 as key support levels to consider getting long. I'll update our Trading Waves and Benzinga Option School members with my trade ideas tomorrow during our live session, so I hope to see you there.

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Image via DALL-E