Starting with a fully invested A-share portfolio to become a capital...

Chapter 258 Mysterious Visitor to Hong Kong Shocks All Sides with His Massive Short Selling

"Hello Mr. J, if you are bearish on the future share price of China Unicom, HSBC can provide services such as short selling through securities lending and over-the-counter put options. Would you like to borrow securities to short sell or buy put options?"

Chen Jiahuan, a securities broker at HSBC, spoke in broken Mandarin to Zhang Yang on the other end of the phone about short-selling business.

He added, "If you want to buy off-exchange put options, the threshold might be a little high. You need to have net assets of HK$1000 million. Of course, for mainland securities clients, we also accept RMB exchange for verification."

Like funds, options can be exchange-traded or over-the-counter. The "buying put/call options" that we usually talk about are exchange-traded options. Their core feature is "contract standardization." All key terms are uniformly formulated by the exchange, and brokers only act as trading intermediaries and have no right to modify them privately with investors.

Over-the-counter options are different; brokers can agree with investors on the strike price, expiration date, and contract size within a certain range.

In essence, over-the-counter options contracts are more like a private betting agreement, because they are agreed upon by the investor and the brokerage firm.

However, unlike a betting agreement, an option contract allows you to choose not to exercise the option and anchor the future price with a minimum principal.

For example, suppose you buy one call option with an exercise price of HK$10, a premium of HK$0.50, corresponding to 1000 shares, for a total premium of HK$500, with a 90-day term.

Ninety days later, the stock price fell to HK$9. If you exercise the option at this point, you will lose HK$1 per share, which is significantly more than the HK$500 option premium. In this case, you can choose not to exercise the option and pay the HK$500 to the institution, thus settling the score.

However, if the stock price rises, for example to HK$20, you can choose to exercise the option and buy 1000 shares at HK$10 each. After deducting the HK$500 premium, the unrealized profit on the stock is HK$9500.

"What is the margin requirement for short selling using securities?" Zhang Yang asked.

Unlike the mainland, Hong Kong Island has a highly regulated financial market, and institutions such as HSBC, Standard Chartered Bank, and Morgan Stanley all have their own set of margin standards.

"Mr. J, HSBC strictly adheres to the Hong Kong Securities and Futures Commission and the general rules of securities firms. Therefore, the initial margin is usually 125% of the short selling value of the stock. That is to say, if you short sell HK$10, this HK$10 will be locked up first, and you will need to pay a margin of HK$2.5 to reach 125% of the short selling value, which is HK$12.5."

"Also, short selling with borrowed funds requires maintaining a minimum margin ratio of 115%. In other words, if the stock price rises, you may need to add margin. If it falls below this ratio of 115%, we will liquidate the position."

Chen Jiahuan patiently explained.

He has worked in the Hong Kong financial industry for more than a decade and has only dealt with a handful of mainland short-selling investors, but without exception, they are all "financial tycoons" with generous spending.

Mainland tourists are already screened before they can even set foot on Hong Kong Island, and those who dare to walk into HSBC to inquire about short selling in securities can basically be labeled as wealthy.

Hong Kong Island and Shanghai are very similar; both are positioned as financial centers. The only difference is that Hong Kong Island is geared towards the whole world. Once money goes to Hong Kong Island, it goes to the whole world.

"With an initial margin ratio of 125%, if you short sell HK$1 million, you will need to pay a margin of HK$2500 million. If the total value of the shares rises to HK$1.2 million, the minimum baseline is 115%, and you will need to add more margin to ensure that the amount of margin you pay is more than HK$2580 million."

Zhang Yang quickly calculated in his mind.

Chen Jiahuan wasn't really ripping people off. The 125% initial margin ratio and the 115% margin call threshold are industry standards in the financial sector. But standards are meant to be broken.

"If we borrow securities to short sell 2 million shares of China Unicom, how much can the margin ratio and the margin call threshold be reduced?" Zhang Yang asked again.

"2 billion?"

Chen Jiahuan was somewhat surprised, his eyes flashing with astonishment mixed with a hint of joy.

If we close a deal worth 2 million, won't we get hundreds of thousands more in performance bonuses at the end of the year?
Chen Jiahuan skillfully took out paper and pen, and said while writing: "If we short sell HK$2 million worth of chips, the initial margin can be reduced by 5%, the forced liquidation line can be widened to 112%, and the daily interest rate of 0.0333% can be widened to 0.0278%, which is HK$5.56 per day."

"It's still a bit high. Lowering the initial margin to 115% and widening the forced liquidation line to 110% would be good. As for the daily interest rate, I don't have any other opinions."

“115% and 110% are far below the standards in the Hong Kong financial industry, Mr. J, you’re putting me in a difficult position.” Chen Jiahuan had barely finished speaking when he changed the subject again: “However, considering that you are all guests from the mainland, we can’t let you go back empty-handed. How about this, if we can verify your funds first, I can apply to my superiors.”

Whether it's borrowing securities or using options, securities firms generally won't lose money.

Take short selling through securities lending as an example. With a daily interest rate of 0.0278%, that's 556 yuan a day. If the short seller holds the position for 100 days, the institution can directly earn 5.56 million yuan passively.

"Can mainland stocks be used as collateral?"

Zhang Yang asked again.

"Of course, but considering the volatility of stocks, we will offer an 80% discount. That is, a mainland stock with a market value of HK$1 will only be valued at HK$8000."

Chen Jiahuan answered quickly, demonstrating a very high level of professionalism.

"Ahem." Zhang Yang coughed twice, indicating, "Let him verify the funds."

Upon hearing this, Liao Guopei couldn't help but bargain in Cantonese: "20% off? Is that too expensive? 10% off, handsome."

“I’m sorry, sir, the 20% discount on stock value isn’t just a rule for HSBC, it’s the rule for the entire Hong Kong Island,” Chan Ka-fai replied with a smile.

"That's outrageous," Liao Guopei complained, then asked, "Where do I log in to my account?"

"Please come this way."

Chen Jiahuan stood up and gave directions.

Seeing this, Liao Guopei picked up his phone from the table and left the meeting room with him.

Not a moment.

They came to a window.

After exchanging a few words with Liang Zhenxing, the window clerk, Chen Jiahuan turned to Liao Guopei and asked, "Mr. Liao, what is your securities company?"

“Huaxin Securities,” Liao Guopei replied.

Chen Jiahuan repeated to Liang Zhenxing, "Huaxin Securities, from the mainland."

Liang Zhenxing: "Okay, enter the number at the input window, now enter the account number."

The so-called window input machine is similar to a bank's password input machine; its function is simply an external keyboard.

"Dududu-"

A prompt appears for each number you press.

"All right."

Liao Guopei did as instructed.

"Enter your login password now."

"Dududu-"

"All right."

"Yes, we've made it up."

Liang Zhenxing nodded in confirmation.

As his gaze fell upon the total value of the stocks in his securities account, he was immediately startled, and the smugness in his eyes vanished instantly.

Anyone who has traveled to Hong Kong Island knows that one of the must-do experiences here is being given the eye roll.

Besides giving the cold shoulder, Hong Kong Island residents tend to treat mainland tourists with a sense of superiority. Of course, this isn't unique to Hong Kong Island residents; natives of Shanghai, Beijing, and Guangzhou also tend to have a sense of superiority towards tourists to some extent.

However, a nine-digit securities account is enough to shatter any sense of superiority.

What is the total value of the shares?

Chen Jiahuan inquired.

“1.1 million Chinese yuan,” Liang Zhenxing replied, swallowing unconsciously.

He sized up Liao Guopei, who didn't look like someone with 1.1 million in assets at all. Judging from his appearance alone, he looked more like a salaried worker with a few million.

In 2009, 1.1 million Hong Kong dollars was enough to buy 10 100-square-meter apartments in the city center, even in Hong Kong Island where land is extremely valuable.

Simply put, it means being able to live a life of luxury and privilege.

"Let's confirm the account holder's information." Chen Jiahuan suppressed his excitement.

He knew that those who could come to Hong Kong Island to short sell in 2009 were not ordinary people; at the very least, they were middle-class people with a net worth of millions.

"Liao Baoguo..."

"Wait, this account number is entered incorrectly. This is my dad's. Change the securities account."

The moment "Liao Baoguo" was read out, Liao Guopei immediately realized that he had mixed up the account numbers. Because he had abandoned the "Jihua Fifth Road" securities account that he used before, he registered several new securities accounts. He also looked for his parents' identities and registered new securities accounts there as well.

"Dududu-"

With the opening of the new securities account.

Another total value exceeding 100 million.

Not only was Liang Zhenxing somewhat bewildered, but even Chen Jiahuan looked at Liao Guopei with new respect, his tone becoming more deferential.

"The identity information is correct, his name is indeed Liao Guopei, and it matches the information on the provided documents." Liang Zhenxing adopted a humble attitude, appearing somewhat obsequious.

"Haha, Mr. Liao, my apologies. I'll take you to the VIP room. Please have a seat while I apply for permission from my supervisor."

Chen Jiahuan was equally obsequious.

1 million is not the only amount.

2 billion!
In Hong Kong, where money reigns supreme, especially in the financial industry, who can resist such high-net-worth individuals?
Forget flattery, whenever Liao Guopei needed them, he could bring the two of them home to enjoy the special "male on top of male" service.

"Yes, as soon as possible, I have limited time," Liao Guopei said, glancing at his Rolex watch.

"this way please."

Chen Jiahuan then led the way.

……

And on the other side.

Citibank.

Lin Guangchang had long heard that Hong Kong Island discriminated against mainlanders who spoke Mandarin, so he simply stated his needs entirely in English.

Unlike HSBC, Citibank's first action upon hearing that Lin Guangchang was planning to short sell was to verify the assets.

As the securities account worth hundreds of millions was logged into Citibank's computer, Chang Qifeng, the previously somewhat negligent salesman, immediately broke into a wide smile, his face beaming with ingratiation, as if afraid of losing a big customer.

When the formal talks began, Zhang Yang once again took over the negotiations remotely by telephone.

After a brief exchange, HSBC's Chen Jiahuan was indeed telling the truth: short selling in Hong Kong generally requires an initial margin of 125% and a minimum benchmark of 115%.

However, because the funds had been verified in advance, Citibank proactively lowered the initial margin ratio and minimum benchmark to 118% and 111%, respectively. Zhang Yang was clearly dissatisfied with this result and told Chang Qifeng to apply to his superiors. If it were any other mainland Chinese, Chang Qifeng wouldn't even give them a second thought.

There's nothing I can do...

They are so rich!

If you have 100 million in stocks, your available funds must be at least several billion.
Citibank acted much faster than HSBC. In less than 5 minutes, Chang Qifeng’s superior, Pan Chengyu, personally received him, agreed to the conditions of a 115% margin ratio and a 110% forced liquidation line, and reduced the daily interest rate to 0.026027%.

Seeing that the other party was so straightforward, Zhang Yang naturally didn't hesitate either. He used Lin Guangchang's 1 million securities account as margin to borrow 3 million Hong Kong dollars worth of shares from Citibank to short sell Huaguo Unicom. The specific total amount of shares would be calculated based on the closing price of the day.

The latest exchange rate for Hong Kong dollars to Chinese yuan is 1 Hong Kong dollar = 0.8807 Chinese yuan. That is to say, this securities account worth 1 million yuan is worth 1.135 million Hong Kong dollars. With an 80% discount, it is worth 9080 million Hong Kong dollars.

The company shorted HK$3 million through securities lending, using HK$9080 million in accounts as margin, representing a ratio of 130.27%.
This level of short selling was so astonishing that even Pan Chengyu and Chang Qifeng were amazed by its audacity.

The "Securities Lending Agreement" with Citibank was quickly signed. In short, it involved borrowing shares to short sell HK$300 million worth of Huaguo Unicom shares. The specific number of shares was calculated based on the closing price on November 2nd, and the margin was secured by Lin Guangchang's securities account.

During the account pledge period, stock trading is permitted, but cash withdrawal is not allowed. If any unauthorized cash withdrawal occurs, Citibank has the right to apply to the bank for a freeze and terminate the "Stock Lending Agreement".

It's also worth mentioning that if stock trading causes the account's stock value to fall below the 110% mandatory liquidation line, Citibank does not need to notify the customer in advance and can close the position to stop the loss.

Citibank might worry about running away with 1 million or 10 million, but with short selling of securities exceeding 100 million, there's basically no need to worry about running away, because they will know as soon as the funds enter the bank and have the ability to freeze and intercept them.

"It's a pleasure to work with you, Mr. Lin."

"Pleasant to work with."

Lin Guangchang and Pan Chengyu shook hands.

Then, Pan Chengyu looked at the Nokia on the table and said with deep emotion, "Mr. J, it's been a pleasure working with you. If you can come to Hong Kong Island next time, I will definitely go to the airport to pick you up in person."

“There will be opportunities,” Zhang Yang replied calmly, then added, “But before that, we still have over-the-counter options to discuss.”

“Over-the-counter options.” Pan Chengyu suddenly realized and greeted him with a smile, “You’re doing hedging, right? No problem, you’re one of our big clients now, so we can be more lenient with the terms.”

Short selling through securities and going long through options are very common hedging strategies.

For example, if you shorted HK$3 million worth of China Unicom and were worried about making a wrong judgment, you could buy HK$3 million worth of short-term call options to hedge. If the stock really fell, you could give up exercising the options and only lose the premium, transaction commission and regulatory fees.

It's worth noting that the longer the option duration, the higher the premium.

For example, short-term out-of-the-money options are the most common and low-cost option contracts. They are characterized by an expiration time of only 1-30 days, a strike price far from the current price of the underlying asset, no intrinsic value, and only a small amount of time value. The premium is generally 0.5%-3% of the current price of the asset.

As for at-the-money options and long-term in-the-money options, their premiums can reach 3%-8% and 8%-15%, respectively.

拿10月30号的茅台股价举例，它当天收在了157.61元，1张看涨期权对应标的价值等于157.61×100=15761元，如果1年到期的实值认购期权缴纳权利金比例是15%，那么它的单张权利金则为2364.15元。

This means that for just 2364.15 yuan, you can buy 100 shares of Moutai at a price of 157.61 yuan per share no matter how much the price of Moutai rises in the following year.

Compared to stocks, options are more complex and the game within them is more dangerous, but what is certain is that options are one of the few leveraged arbitrage opportunities that allow you to trade time for space.

Just when Pan Chengyu thought Zhang Yang was going to hedge, Zhang Yang on the other end of the phone denied it, saying, "No, what I want to buy is a short-term phantom put option."

"Put options???"

Pan Chengyu was completely stunned.

Is there some inside information involved?

It's one thing to borrow 3 million to short sell, but now they're adding put options on top of that. Is this some kind of crazy scheme?

Could it be that……

A last-ditch effort before jumping off the building?
"Gulu——"

Pan Chengyu swallowed hard. Even he, as a securities business manager, wouldn't dare to take on this level of short selling; he would have to consult his superior, the foreign senior manager.

"Well... as for over-the-counter options, we need to have a meeting to discuss it. We'll give you an answer by tomorrow at the latest."

Pan Chengyu stammered.

"Give me a reply by today. If that doesn't work, we'll find another company," Zhang Yang said in a deep voice.

Mainland financial institutions may not accept this kind of business because it is still in its infancy, but it is different in Hong Kong Island, where there are countless financial institutions of all sizes in Central.

If Zhang Yang isn't afraid to abscond, he can even find a black market financial institution to place put options.

"I'll call a meeting with the leadership right away."

Pan Chengyu didn't want to let go of this lucrative opportunity. Even if Citibank lost money, the company would cover it; he only cared about the performance.

However, Pan Chengyu couldn't understand why this "Mr. J" dared to short-sell China Unicom, a company that had partnered with the Chinese version of the iPhone 3GS. It was simply unbelievable.

"Go."

Zhang Yang responded with a gesture.

When Pan Chengyu consulted with the foreign leader, Zhang Yang on the other end of the phone expressed some regret. Although Hong Kong financial institutions had options and short selling, they did not offer end-of-term options.

What are end-of-day options?

Generally speaking, this refers to options that are close to their expiration date. They have extremely high leverage and no time buffer. They are also called death options or devil options.

In his previous life, when Zhang Yang was a fund manager on Wall Street, a mysterious buyer purchased 1000 doomsday put options just before the US stock market crash, reaping a return of 20 times.

While Citibank was having its meeting, HSBC was very accommodating, agreeing to a 3 million short-selling agreement with a 115% margin requirement, a 110% forced liquidation line, and a daily interest rate of 0.0278%. They also agreed to sign a put option agreement, although it would have to wait until the Hong Kong stock market closed at 4 p.m.

Since options are essentially about trading time for space, if you sign a contract now, who can guarantee that nothing will happen in just a few hours?
Zhang Yang had no objections.

Liao Guopei naturally had no objections.

After reaching a short-selling agreement with HSBC, Liao Guopei went to Morgan Stanley, again indicating that he wanted to borrow securities.

Unlike his previous encounter with HSBC, this time he was smarter and directly showed off his mainland securities account worth 1 million yuan, instantly becoming a VIP treated by the securities business manager.

……

The financial circle in Hong Kong is very small. In less than two hours, news that mainland financial investors had shorted China Unicom in large quantities spread to major institutions.

At this moment, in a trading office area of ​​Goldman Sachs' Hong Kong Island branch, a group of men and women were intently watching their screens while chatting and gossiping.

"Sister Li, do you think these mainlanders might know some inside information and are deliberately coming to Hong Kong to short sell for profit?"

"It's very likely. I've heard that there's no short-selling mechanism in mainland China yet."

"No short selling? Really? Does that mean retail investors can only buy long?"

"Yes, you can only buy when the price goes up, and there are price limits. If the price goes up or down by 10%, you can't play anymore. It's like children playing house."

"I know about price limits, but I've never heard of not being able to short sell before. No wonder you've come all the way to Hong Kong Island to short sell."

At this point, the short-haired woman called Sister Li looked away from the screen and at the middle-aged man next to her, saying, "Hey, do you guys think we could make a little money buying now?"

Unlike mainland China, where financial professionals are prohibited from trading stocks, Hong Kong allows them to do so, albeit with restrictions. For example, they must report to their institution before trading, and some institutions explicitly prohibit their employees from engaging in intraday high-frequency trading. In addition, institutions regularly review trading activities, and if insider trading is discovered, the consequences are not just a slap on the wrist, but criminal penalties, with a maximum fine of HK$10 million and imprisonment for up to 1000 years.

With the threat of a HK$10 million fine and a 1000-year prison sentence, Hong Kong stock market financial professionals generally dare not take risks unless they have a backup plan.

"Buy it! Apply now!"

The middle-aged man responded with a smile.

No sooner had he finished speaking than someone questioned, "Brother Su, are you serious? Don't let us buy it and then you secretly save the money to go for a massage yourself."

"I'm not that kind of person. I genuinely feel that if someone dares to short the market so heavily, they must have some inside information."

The middle-aged man shared his thoughts.

"Then let's try shorting later. It's fine to try it with a small position," Sister Li nodded in agreement.

As financial professionals, they are usually quite restrained. The main reason they want to follow the trend and short sell is that the other party is making a lot of money, with multiple institutions shorting for over 100 million in a row.

The news that a "mysterious mainland customer" was shorting China Unicom was still spreading. David, who was Goldman Sachs' "secret agent president" in Hong Kong, felt something was wrong after hearing that someone had been shorting China Unicom in large amounts. He immediately called his subordinate Solan Avery and asked his trading team to stop all trading operations related to China Unicom.

After doing all this, he called Freya of the Quantum Foundation.

“Hey David.”

Upon hearing the other party's voice, David immediately questioned, "Who is shorting China Unicom?"

obviously.

He thinks it's the Quantum Foundation.

The Quantum Fund is notorious for its love of short selling, and when it gets ruthless, it doesn't distinguish between friend and foe.

Although Quantum Fund and Goldman Sachs are cooperating on strategic deployments in Hong Kong, China Unicom is not within their mutually beneficial cooperation scope. Theoretically, they could be at odds with each other.

"Even if you don't make this call, I'm still going to call you. Is it because Goldman Sachs wants to short China Unicom's stock price?"

Flinya countered with a question.

"Am I stupid? China Unicom's performance and future potential are both promising, how could we possibly short it?" David denied, but added earnestly, "If it's not us, then it's probably Morgan Stanley, Tiger Fund, or other institutions. I don't know what their motives are."

"I don't know what their purpose is, but if Goldman Sachs doesn't add short positions, then I'll have to open long positions." Freya flicked her long hair at her temple and smiled faintly on the other end of the phone.

In her view, with the domestic version of the iPhone 3GS in hand, China Unicom's stock price is unlikely to fall in the short term, and there is no reason for it to fall.

When David heard that Freya wanted to add more shares, he was taken aback at first, ruling out the possibility that Quantum Fund was shorting the stock, and then wished her well, saying, "Good luck, and may God bless you."

"I am a believer..."

David hung up the phone before he could even utter the words "Frinya Satan".

Since the Quantum Fund didn't short the stock, it must have been other institutions. David called them one by one, trying to find out the details.

However, Wall Street capital institutions such as Morgan Stanley, Tiger Fund, and Jaguar Fund have all stated that they have not added short positions.

After excluding "family members," David looked at the intraday chart of China Unicom and muttered to himself, "It seems that it is really necessary to add some long positions."

　Be aware of the risks associated with the tech sector's clustering trend.

　　
　
(End of this chapter)