Why Options Traders Should Start Monitoring The Hang Seng Index

After the steep fall beginning in February, when Hong Kong's Hang Seng lost a quarter of its value, the benchmark index has relatively stabilized. Between April and May, the index traded between 22,502 and 19,380.

The range narrowed even further between June and July when the index seesawed between 22,418 on the upside and 20,297 on the downside. This pattern clearly shows that volatility has been on a downtrend.

The VHSI: The HSI Volatility Index or the VHSI is an indicator of volatility on the Hang Seng Index. It is forming a descending triangle pattern on its 1-hour chart and is currently trading close to 27 levels as compared to the 49 mark seen in March.

Source: Trading View

Why It Matters: Whenever an asset, either stocks or indices, trades in a triangular pattern, there is a high probability that sooner or later it breaks out of that pattern. Options traders can utilize this opportunity to take non-directional trades if the VHSI breaks out on the upside, just as it did in January, as shown in the following chart.

Source: Trading View

How To Trade: If you are a trader who does not believe in taking directional risks, you could wait for the breakout of the VHSI on the upside and take a long straddle in index options. A long straddle is a simultaneous purchase of a call and a put option at a strike price closest to the index level. So for example, if the index is trading at 20,600, you can buy call and put options at this strike and wait for the volatility to spurt.

The rise in volatility over the short term can make the option price explode where the surge in one leg of the options trade could be way higher than the loss in the other. Risk-loving traders could simply take a directional view and buy a naked call or a put option depending on the direction of the index.