It is said that the probability of a rise in Hong Kong stocks during the National Day holiday is nearly 90%. At this point, should one buy or sell…

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As the National Day holiday approaches, this period often serves as an amplifier for the tug-of-war between bulls and bears in Hong Kong stocks. The suspension of Stock Connect brings a liquidity gap, potential unexpected impacts from overseas or domestic events during the holiday, combined with investors' conflicting mentality of whether to "take profits" or "make early arrangements," which frequently triggers market volatility.

At this juncture, let us examine if there are any patterns from past occurrences during this period, what key events warrant attention this time, and explore directional insights and considerations for options strategies.

Does the National Day holiday bring a notable 'holiday effect' to Hong Kong stocks?

Regarding the market trends around the National Day holiday for Hong Kong stocks, historical data analysis from various institutions suggests there may indeed be a noteworthy 'calendar effect,' characterized generally by a pattern of 'pre-holiday caution - mid-holiday rise - post-holiday shift.'

To quickly grasp the core patterns, the following table summarizes the typical characteristics of the three phases: pre-holiday, mid-holiday, and post-holiday.

Here is a more detailed explanation of the driving logic behind these phases.

● The rhythm before the holiday is mainly driven by capital factors: some investors sell stocks before the holiday to meet funding needs for holiday consumption. Additionally, to hedge against possible uncertain events in overseas markets during the holiday, risk aversion also comes into play.

● The situation during the holiday may be boosted by policy expectations: The National Day period marks the beginning of the fourth quarter, and attention from the market to subsequent economic meetings, policy expectations, and macroeconomic trends is gradually increasing. Additionally, with the suspension of trading in A-shares during this period, some funds focused on Chinese assets may shift to Hong Kong stocks, such as overseas capital potentially flowing in.

● The post-holiday trajectory will be more driven by event-driven factors and profit-taking: The specific performance of the market after the holiday will be influenced by policies released during or immediately following the holiday, as well as overseas economic data. If the cumulative increase during the holiday is too large, the first day post-holiday could face short-term profit-taking pressures. However, over time, the calendar effect will diminish, and market focus will revert to medium- and long-term logic and fundamentals.

It is also important for everyone to understand that analyzing historical data can help better understand market behavior, but history does not represent the future and does not constitute investment advice. Any investment decision should still be based on changes in market conditions, fundamental circumstances, personal investment goals, and risk preferences.

What key events should we focus on at this time this year?

Based on current market conditions and historical patterns, three types of events are worth focusing on during this year’s National Day period.

1. Status of Stock Connect and Southbound Funds

Yesterday (September 29) and today (September 30), Stock Connect remained operational, while it will be suspended from October 1 to October 8. This means that Southbound funds cannot participate in Hong Kong stock trading during the National Day period, which will result in reduced market liquidity.

Moreover, under these circumstances, Hong Kong stocks are more vulnerable to impacts from overseas capital flows and localized selling pressure. For instance, certain arbitrage funds might take advantage of the liquidity vacuum to execute operations such as initially driving prices down and subsequently pulling them back up.

2. Key Domestic Events and Data

Domestic consumption data and the strength of policies in the fourth quarter are two major areas of market focus.

Today (September 30), the domestic release of September's manufacturing PMI data showed a value of 49.8, up by 0.4 percentage points from 49.4 in August and slightly higher than the market expectation of 49.6. This marks the third consecutive month of recovery, although it remains below the critical threshold of 50. As a forward-looking indicator reflecting economic sentiment, this performance indicates a marginal improvement in the manufacturing sector’s activity level. However, market demand still needs further strengthening, and the foundation for an economic rebound requires consolidation.

Regarding policy expectations for the fourth quarter, focus can be placed on the upcoming Central Economic Work Conference after the National Day holiday. Recently, China has introduced a series of policies to stabilize finance and the real estate sector. If there are further stimulus measures after the holiday, Hong Kong stocks, particularly in technology and consumer sectors, may benefit. Market style shifts post-holiday are also typically associated with policy expectations. However, if the policy measures fall short of expectations, it could lead to increased downward pressure after the holiday.

3. Key overseas events and data

During the National Day period, major overseas events include U.S. non-farm payroll data, the risk of a U.S. government shutdown, and Japan's elections.

The U.S. non-farm payroll data (originally scheduled for release on October 3) showing cooling in the labor market could reinforce expectations of interest rate cuts by the Federal Reserve, benefiting global growth-oriented assets (such as Hong Kong-listed tech stocks). However, strong data might push up the U.S. dollar and Treasury yields, which would instead weigh on Hong Kong stocks.

It is important to note that the U.S. federal government's fiscal year ends on September 30 each year. However, if bipartisan disagreements over fiscal policy cannot be resolved, a government shutdown crisis may occur, potentially delaying the release of the non-farm payroll data and further exacerbating market volatility. This is also something investors need to monitor closely.

Additionally, attention should be paid to the U.S. ISM Manufacturing PMI data (released on October 1), which reflects the resilience of the U.S. economy. Persistent contraction (below 50) may intensify global recession concerns and prompt capital flows into defensive sectors.

The outcome of Japan’s general election may impact the yen exchange rate and capital flows in the Asia-Pacific region. If the election triggers risk aversion, some international funds may temporarily withdraw from Hong Kong stocks; conversely, if results are stable, it may boost risk appetite. Overall, however, the direct impact on Hong Kong stocks in this regard remains relatively limited.

Furthermore, it is crucial to monitor the performance of U.S. stocks and the interconnectivity between Hong Kong and U.S. stock markets. A robust rise in the U.S. equity market during the National Day period could generate spillover effects on the Hong Kong stock market. If U.S. stocks experience significant fluctuations due to economic data or interest rate expectations, it may amplify volatility in Hong Kong stocks through sentiment transmission.

Finally, for investment purposes: use options to seize opportunities and manage risks?

Since there is quite a bit of content to cover in this section, it will not be discussed in great detail. Here is a general outline of the approach.

1. If you plan to hold shares through the holiday

you can consider holding fundamentally strong stocks (e.g., $TENCENT(00700.HK)$ 、 $BABA-W(09988.HK)$ ) while selling out-of-the-money Call options.

The aim is to enhance returns through premium income and offset potential losses if the stock price declines. Since this strategy involves receiving premiums rather than paying them, it carries less risk compared to buying Put options, where there is a possibility of losing the entire premium paid.

For example, when the stock price is at HKD 175, you could sell a Call option with a strike price of HKD 195 expiring in one month. If the stock price does not exceed this level, the option will not be exercised, and you will retain the premium. However, if the stock price rises above this level, you would forgo additional gains that could have been realized on the underlying stock.

2. Based on the historical tendency of prices to rise during the holiday period,

consider using short-term Call options to position in the technology and consumer sectors either at the end of the trading day before the holiday (i.e., today) or during the holiday itself.

If the stock price rises, all else being equal, the value of the Call option will generally increase as well. Moreover, Calls typically offer greater leverage compared to the underlying stock.

For instance, if the stock price increases by HKD 1, a rise of HKD 1,000 for 1,000 shares, and your purchase cost is HKD 10,000, then the profit ratio would be 10%. Meanwhile, the price of the option might change by HKD 0.6. Since one options contract corresponds to 1,000 shares, the overall change would be HKD 600. However, your cost of purchasing the option might be only HKD 1,000, resulting in a profit ratio of 60%, significantly higher than that of the underlying stock. This makes it more suitable for investors with limited capital or those aiming to substantially enhance capital efficiency. Of course, if the stock incurs a loss, the loss ratio for the option would also be greater.

Furthermore, due to various events during the period, the implied volatility (IV) of the option may rise (IV reflects investors' expectations regarding the future volatility of the underlying asset). The higher the IV, the higher the price of the option, assuming all other conditions remain unchanged. Conversely, a decline in IV would lead to a reduction in the option's price.

Although short-term Call positions are being considered, it is advisable to choose contracts expiring after the holiday to avoid excessive time decay of the option’s value.

3. If basing on the pattern that there could be a pullback on the first trading day after the holiday and a return to fundamentals one week later,

To avoid chasing highs on the first day, it is recommended to maintain observation initially. Once market profit-taking pressure subsides, consider employing a Bull Call Spread strategy to capitalize on potential market recovery movements.

This involves simultaneously buying a Call at a lower strike price while selling a Call at a higher strike price, both linked to the same underlying stock, expiration date, and quantity. The purpose of buying the Call is to capture potential upward movements, while selling the Call helps reduce the overall cost of the strategy (but at the expense of capping higher potential profits).

The greatest risk of this strategy is the potential loss of the entire initial premium outlay. For example, if you spend HKD 2,000 to buy a Call and receive HKD 1,200 from selling another Call, your net premium expenditure is HKD 800. If opting for this strategy, you should be prepared for the possibility of losing the entire HKD 800. Alternatively, consider implementing timely stop-loss measures during the process.

4. Opportunities related to volatility trading can also be explored.

If the implied volatility (IV) of certain underlying assets has risen before the holiday, one might consider selling options to capture time value. For instance, sell Puts if a significant short-term decline is not expected, or sell Calls if a substantial short-term rise is not anticipated.

However, if there are concerns about the risks of unilateral selling leading to assignment, one can add an additional trade by purchasing an option with the same strike price but a longer expiration date, forming a calendar spread strategy to hedge against the risk of extreme market fluctuations, ensuring that risk does not expand uncontrollably.

It is important to note that on the expiration date of the option, if the price of the underlying asset is very close to the strike price of the option you sold, the price of this option will become extremely sensitive to small fluctuations in the underlying asset's price, potentially resulting in unexpected losses. Therefore, it is advisable to monitor the situation closely and consider implementing timely profit-taking or stop-loss measures.

Other risks include the fact that this strategy bets on a decline in volatility. If volatility rises significantly, it may lead to losses for the overall strategy. Additionally, it is crucial to ensure sufficient liquidity for both options being traded to avoid excessive spreads eroding profits.

Furthermore, when the near-term option expires worthless, you will have realized the maximum profit on that option. At this point, you need to decide whether to close out your position on the longer-dated option or sell another option to construct a new calendar spread strategy.

Lastly, let us remind everyone of the risks. As mentioned earlier, during the National Day period, the closure of Stock Connect in Hong Kong may pose certain liquidity risks, as market depth could be insufficient, potentially widening bid-ask spreads for options. It is advisable to avoid large trades during periods of low trading activity. Moreover, the aforementioned events could impact market conditions and trigger volatility, so staying vigilant is essential.

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