No surprise to see a highly active........>

HONG KONG: No surprise to see a highly active USD/HKD options market this

morning, with HKD hedging activity running well ahead of average for this time

of day. Mirroring the stresses seen in HKD forward markets (1y, 2y forward

points have spiked to multi-decade highs, highest levels since 1999), HKD

implied vols have surged, with the 1y measure now rivalling the late 2019 highs.

- USD/HKD calls have been favoured, with 7.80 strikes in firm demand.

Interestingly, however, are the trades lodged to profit on a move above 7.85 in

spot (the upper end of the HKMA's trading band). According to DTCC data, close

to $800mln of call options have crossed this morning with strikes at 7.85 or

above either as a standalone trade or one leg of a 7.75/7.85 strangle.

- While these trades may appear best placed to profit on the HKMA's USD/HKD

trading band being broken to the upside, it may also be the case that the buyer

is looking for an uptick in implied vol on the position rather than a true

breakout in the spot rate. Most positions crossing have a decent shelf life,

with the larger trades eyeing late November 2020 expiries, although some look to

roll-off mid-2021 also.