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

Chapter 260 The excessive issuance of put options alarmed Old Master Bao.

Having reached preliminary agreements on over-the-counter options with institutions such as Citibank, HSBC, and Morgan Stanley in the morning, Zhang Yang, Liao Guopei, and Lin Guangchang acted swiftly after the Hong Kong stock market closed, negotiating a "Short-Term Out-of-the-Counter Put Option Contract" for China Unicom in Hong Kong with a premium of 1.5% of the underlying asset value.

At this point, some people may ask: if a stock's price movement can be locked in with just a 1.5% premium, won't the financial institution making the bet lose money?

To understand this issue, we need to first understand the relationship between costs, risks, and benefits.

In the realm of legitimate investments—and this is crucial—cost, risk, and return are in a triangular relationship. There are no investment targets that offer low cost, low risk, and high returns; if such a thing exists, it is undoubtedly a financial scam.

Why are short-term out-of-the-money option contracts less expensive than long-term in-the-money option contracts?

The reason is that short-term out-of-the-money option contracts with a term of 1 to 30 days have a high risk profile and no time value.

Long-term in-the-money option contracts start at 6 months, possess high intrinsic value, time value, and strong certainty, and have a higher premium ratio, generally between 10% and 15%, and some even higher.

For example, in 2008, the government clearly stated that it would invest heavily in infrastructure.

If you buy short-term out-of-the-money option contracts for related stocks immediately after the policy document is released, the first problem you will face is whether the stock price will receive a positive response from the policy within 30 days, as well as the issue of short-term capital control.

To put it bluntly, everyone knows that the infrastructure sector will rise, but when it will rise is still a question that needs to be considered.

Does positive news always guarantee a price increase?

This is not necessarily the case.

Because short-term trading is a zero-sum game between bullish and bearish funds, whether the price goes up or down cannot be determined solely by policy factors; it also depends on the flow of funds and the willingness of major players to drive up prices.

Take Baosteel as an example. It is a leading steel company and a direct beneficiary of the "4 trillion yuan investment plan".

2008年11月5日文件落地，宝钢股份就出现了连续拉升，从11月6号的4.26元，一路上涨到了11月14号的5.6元，涨幅达到了31.45%，然而触摸到5.6元后，宝钢股份的股价就开始了M型波动，11月25号跌回4.74元，12月09号又涨回5.82元，紧接着12月31号又再次跌回了4元区间，最低摸到4.62元。

This clearly shows that even with highly certain policy documents, stock prices in the secondary market still fluctuate.

可如果把时间线拉长，买入宝钢股份的《长期实值期权合约》，2009年2月17号摸到了6.44元，2009年6月25号摸到了7.38元，2009年8月4号更是摸到了10.33元，明显接住了政策放水。

This is why short-term out-of-the-money option contracts only require a premium of 0.5%-2%, while long-term in-the-money option contracts require a premium of 8%-15%.

Institutions may lose money, but every contract signed is definitely beneficial to them, and only secondarily to the investors.

When Liao Guopei and Lin Guangchang arrived at the Cheung Kong Center, floors 59-63 and 65-68 were Goldman Sachs' offices on Hong Kong Island.

Looking at the towering skyscrapers, the two couldn't help but sigh.

“This is the last one.”

"After we sign this contract, we should be able to go back to the mainland, right?"

Upon hearing Lin Guangchang mention returning to the mainland, Liao Guopei remarked meaningfully, "Don't rush back. You should experience the nightlife on Hong Kong Island."

Financial metropolises are never short of nightlife. Because of the fast pace of life, people become increasingly stressed, so on weekends, the brightly lit venues on Hong Kong Island are packed with people, and the upper class holds all kinds of parties.

Lin Guangchang glanced at his watch and stepped into the building first, saying, "I'm not interested in any of this. It's just a matter of having more foreigners."

"You got married early, and now you're locked up," Liao Guopei said, quickly catching up.

"I got married late. How should I put it? As long as you are strong enough inside, you won't have to ask the outside world for your emotions."

Lin Guangchang smiled faintly.

He didn’t know what Liao Guopei had been through. He was already 34 years old and still didn’t plan to settle down. Maybe he was just naturally inclined to be a wanderer.
Of course.

Lin Guangchang also respects Liao Guopei's choice.

Since we only live once, there's nothing wrong with being happy, joyful, and following your heart. It's just a matter of making different choices.

Hearing that Lin Guangchang was so devoted to his relationship, Liao Guopei jokingly said with a smile, "You're such a good man to support your family. If I were a woman, I would definitely marry you and have two more children with you."

"Don't say such disgusting things, or I'll start to question your sexual orientation."

"Go to hell, I was praising you."

"You can just praise me directly."

"You're such a good man, a real gentleman. By the way, with all that money you're making, what are you planning to do with it?"

"Buy a house to collect rent, open a coffee shop."

"In Shanghai?"

"Why not?"

"I thought you were going to eastern Guangdong to buy houses and collect rent, that's all too familiar to you."

"If you have money, you can collect rent anywhere. If I had billions, I would definitely spend a billion to buy a house, just like buying an investment product."

"good idea."

Liao Guopei and Lin Guangchang chatted for a while as they took the elevator to the relevant business floor of Goldman Sachs.

Since Liao Guopei had been there that morning, the receptionist greeted him with a big smile and said, "Good afternoon, Mr. Liao. Please wait a moment. Our supervisor, Solan Avery, will be here shortly."

"it is good."

Liao Guopei responded.

He didn't know who this person was, but guessed it was the Chinese manager's superior from this morning.

As the receptionist made a phone call, a middle-aged white man in his 30s, with brown curly hair and dressed in a suit, quickly approached. He recognized Liao Guopei at a glance, having watched many of Liao Guopei's surveillance screenshots at noon.

"Mr. Liao."

Solan Avery's azure eyes crinkled with a smile as he greeted them warmly, then turned to Lin Guangchang beside him and asked, "And this gentleman is?"

Although Liao Guopei's English wasn't very good, he was still a college graduate and could understand and speak some simple words. He quickly replied, "My friend is Lin Guangchang."

"Lin Guangchang, it's a pleasure to meet you."

After shaking hands with Liao Guopei, Solan Avery shook hands with Lin Guangchang. Then he gestured for them to meet, saying, "This way, please. Our President David Smith has been waiting for you for a long time."

"Lead the way."

Liao Guopei also raised his hand in acknowledgment.

As Solan Avery took the lead, Liao Guopei immediately looked at Lin Guangchang and whispered, "What did he just say about Big Eater?"

“David, Smith, is a very common name in the United States, similar to Jiahao, Jiaxin, and Jiajie in eastern Guangdong. You can call him David or Smith, but he’s usually called David. And this person said that President David has been waiting for us for a long time,” Lin Guangchang quickly explained.

"I see."

Liao Guopei nodded slightly.

After passing through several open-plan office areas, Liao Guopei and Lin Guangchang arrived at the door of an office. Solan Avery knocked on the open glass door and greeted them in fluent English, "President David, Mr. Liao and his team have arrived."

Inside the spacious office, David Smith was wearing a white shirt. His physique, honed by years of fitness training, made the shirt stand out, and paired with his sexy beard, he would definitely be considered a "top pick" if he went to Chengdu.

"Mr. Liao."

David Smith got up from his workstation.

"President David... um... let my friend talk to you." Liao Guopei spoke in a mix of Chinese and English, and it was obvious to everyone that his English wasn't very good.

"I am his friend Lin Guangchang, hello President David," Lin Guangchang immediately replied.

"Could you be Mr. J?"

David Smith had an idea.

Although it wasn't David Smith or Solan Avery who received Liao Guopei in the morning, they had already learned about the specifics from the relevant salesperson and knew that the person behind the scenes was called "Mr. J".

"No, I'm just like him, I run errands, haha."

Lin Guangchang smiled and glanced at Liao Guopei beside him.

"Running errands".

David Smith muttered to himself.

He was a little curious about why "Mr. J" couldn't show his true face. Was his identity extremely special?

Don’t say it yet!
It's really possible!

There's a saying circulating among American financial institutions: just focus on collecting money for investment and ensuring compliance with procedures, without delving too deeply into the identity of the investors. Otherwise, the investigation might end up in Washington, D.C.

"This way, please." David Smith gestured for the two to proceed to the negotiation area.

"please."

Lin Guangchang smiled and replied.

The four then took their seats one after another.

Without hesitation, Lin Guangchang took out his phone and looked at David Smith, saying, "President David, I'll call Mr. J now. You can discuss the specific options details yourselves."

“Okay.” David Smith nodded.

He was very curious about "Mr. J's" voice, and at the same time he knew that there were many families in China that were hundreds or even thousands of years old, and "Mr. J" might be one of them.

"Dududu-"

During the busy signal, Lin Guangchang turned on speakerphone and placed the phone on the table.

Not a moment.

The call is connected.

"Hello."

Zhang Yang kept his voice low, trying to make it sound deep and resonant.

For strangers who don't often interact with each other, even if the other party may have heard Zhang Yang's voice through some media channels, it is basically impossible to identify Zhang Yang's specific identity by his voice. Moreover, mobile phones will also affect the tone of voice to some extent.

"President David Smith is on the phone with you," Lin Guangchang announced.

Zhang Yang reacted quickly, immediately switching to English to greet him: "Hello, President David Smith."

“Hello, Mr. J,” David Smith greeted him before getting straight to the point: “Our business manager told me you want to negotiate with us on the ‘Over-the-Counter Short-Term Out-of-the-Money Put Option Contract’ for China Unicom’s Hong Kong shares?”

“That’s right,” Zhang Yang replied.

"How much stock options are you planning to offer?" David Smith asked again.

“One option corresponds to 1000 shares, 100,000 options, the premium ratio is 1.5%, what do you think?” Zhang Yang spoke with considerable expertise.

The reason he is so proficient is mainly because he practiced speaking to Citibank, HSBC, and Morgan Stanley, and he also figured out the minimum royalty rates of these institutions.

"10 shares, 1000 shares each, totaling 1 million shares. Based on today's closing price of HK$11.68, that's HK$11.68 billion, which translates to..."

David Smith was about to check the exchange rate on his phone when Zhang Yang directly quoted the total price: "Approximately 10.288 billion Chinese Yuan."

“Thank you, Mr. J. It seems you came prepared.” David Smith expressed his gratitude, but still checked today’s exchange rate on his Hong Kong version iPhone 3GS and quickly calculated the amount in his mind. “I like to be well-prepared for everything,” Zhang Yang replied with a faint smile.

"It really is 10.288 billion Chinese yuan." David Smith exclaimed inwardly. He knew that the exchange rate fluctuated in real time, which meant that this "Mr. J" had calculated the exchange amount between the two currencies in less than a second.

However, David Smith quickly recovered. He knew that "Mr. J" had already contacted multiple financial institutions to short the stock and knew the premium ratio of the "Short-Term Out-of-the-Money Options Contract," so he didn't argue but nodded in praise:
“I like dealing with people like Mr. J, he’s straightforward. So let’s do it your way. 10.288 billion RMB, 1.5% is 1543.2 million RMB. The mainland stock pledge will still follow the old rules, it needs to be discounted by 80%.”

"Oh, right."

David Smith then seemed to remember something and reminded him, "You should be aware that any channel service fees, settlement fees, stamp duties, and other charges that may arise will be borne by you, right?"

"clear."

Zhang Yang responded.

Over-the-counter transactions do not involve transaction fees, but settlement fees and stamp duty must be paid.

Settlement fees are collected by the settlement institution and are generally HK$300-500 per transaction. If the settlement is made through the Central Clearing House, it will be more expensive, around HK$600 per transaction.

Stamp duty goes without saying; all investments must pay stamp duty.

In addition to settlement fees and stamp duty, there is a transaction levy, which is approximately 0.003% of the total transaction amount.

Seeing how skilled Zhang Yang was, David Smith immediately gestured to Solan Avery and said, "Go and call the lawyer to draft the relevant contract terms."

"Okay CEO."

Solan Avery stood up.

“Actually, it doesn’t need to be so complicated. We’ve already prepared a template,” Zhang Yang suddenly said on the other end of the phone.

"template?"

David Smith was puzzled.

Solan Avery, who had just stood up, looked at the phone on the table with some hesitation.

Lin Guangchang then skillfully took out a blank contract and placed it on the table, saying, "This is the option contract we have drafted. If there is anything to add, you can discuss it with us."

As soon as he finished speaking, Zhang Yang chimed in, "Yes, but I hope the main body remains unchanged."

Solan Avery looked away and landed on David Smith, as if seeking his opinion.

After a brief hesitation, David Smith nodded, gesturing for him to take the contract out to have it checked by a lawyer. Then he said, "I must say, Mr. J, your preparation is indeed very thorough. I have a question that I hope you will be able to answer."

"inconvenient."

Zhang Yang refused outright, but then changed the subject, saying, "Just kidding, go ahead."

David Smith: "..."

Are they making a fool of him?
After a moment of silence, he asked, "Judging from your accent, you must have been in the United States for a long time, right? Are you an overseas Chinese?"

Like Chinese, English has different styles in different regions, and is often accompanied by accents.

Take English for example. Unless you have received special training, it is very easy to distinguish between the spoken English of white people and black people. In addition, there is Indian curry-flavored English. As soon as you open your mouth, the curry flavor can hit you right in the head.

"I live in the United States."

Zhang Yang answered very decisively.

He did indeed live in the United States, but that was in his previous life. Strictly speaking, Zhang Yang was not lying.

However, upon hearing this, Lin Guangchang couldn't help but chuckle to himself, "Goodness, Joker is really good at bragging. He even claims to have settled in the United States long-term. He must be able to fool foreigners into believing he's a placenta."

"In New York?"

"It can only be New York."

"Then I guess he works on Wall Street."

"That's it."

When Zhang Yang uttered those words, David Smith already had a mental image of "Mr. J"—roughly 30-40 years old, Chinese, a finance professional, and with assets exceeding 100 million.

In David Smith's view, if needed, it would not be difficult to find this "Mr. J" by following this portrait.

He never doubted that Zhang Yang was lying, because an "American accent" requires long-term conversational training, and it is virtually impossible for someone who has not lived in the United States for an extended period of time to possess it.

"Let me ask another question, even if it's a bit presumptuous." Before Zhang Yang could speak, David Smith had already thrown out the question: "Right now, China Unicom shows no signs of decline. On the contrary, because it's the exclusive distributor of the Chinese version of the iPhone 3GS, its future performance has a definite direction. Why do you dare to place such a large short order? Aren't you afraid of losing everything?"

Can't figure it out.

He really couldn't figure it out.

Not to mention David Smith, financial institutions throughout Hong Kong Island couldn't understand it, but they couldn't refuse business that was offered to them.

"Sign the agreement first, and then I'll tell you the answer," Zhang Yang said with a faint smile.

Listening to the other party's nonchalant and confident tone, David Smith hesitated. "Over-the-counter short-term out-of-the-money option contracts" are not the same as "exchange-traded short-term out-of-the-money option contracts." They are essentially a bet between institutions and investors, anchored to future prices.

Now, all financial institutions in Hong Kong Island, as well as all financial institutions in mainland China, including China Unicom and its competitors, all believe that China Unicom's stock price will rise, because the mainland version of the iPhone 3GS sold out on its first day.

The prices of 6999 and 7999 were actually uncertain for China Unicom, and they did not have Foxconn produce them in large quantities. However, with the huge sales on the first day, Foxconn's production lines were already running at high speed.

"Then I'll be all ears."

David Smith answered.

……

Half an hour later.

Solan Avery returned to David Smith's office, accompanied by a hot, blonde, blue-eyed white female lawyer.

"There's no problem with the agreement, Mr. President."

The white female lawyer had barely finished speaking when she changed the subject, saying, "However, this is an American-style 'Short-Term Out-of-the-Dots Option Contract,' which can be exercised at any time before the 30-day settlement date."

There are two types of option contracts: American and European.

American-style options contracts can be exercised at any time before the agreed settlement date, while European-style options contracts can only be exercised on the settlement date.

"Sign if there are no problems."

David Smith didn't care whether it was European or American; he firmly believed that China Unicom would not decline and that he could make a net profit of tens of millions of Chinese yuan from the other side.

He also wanted to know what "Mr. J's" basis was for short selling.

"Check the contract carefully, and sign it once you've confirmed everything is correct," Zhang Yang said, gesturing for it to be signed.

Both parties were seasoned veterans, and they quickly signed the "Over-the-Counter Short-Term Out-of-the-Counter Put Option Contract" worth more than RMB 10 billion.

Because it is an American-style option contract, Zhang Yang can exercise the option once within the next 30 days. After 30 days, regardless of whether the option is exercised or how the price changes, the premium of more than 10 million yuan will not be returned.

"All right."

"Signed."

After signing and stamping the contract, Lin Guangchang stood up and said, "We are now taking the option contract to the exchange for registration. We apologize for disturbing President David Smith."

"and many more."

David Smith also stood up, looked at the phone on the table, and asked, "Mr. J, you still haven't told me your reason for shorting."

"Performance collapsed."

Zhang Yang responded calmly.

Immediately afterwards, Lin Guangchang picked up his phone and left Goldman Sachs with Liao Guopei.

David Smith frowned and muttered to himself, "Performance collapsed, performance collapsed, what aspect collapsed?"

"It shouldn't be!"

"impossible!"

"That doesn't make sense!"

When David Smith couldn't understand it, Solan Avery chimed in, "It feels like Mr. J is talking nonsense. How could China Unicom, the exclusive distributor of the Chinese version of the iPhone 3GS, possibly have its performance collapse? This is simply alarmist."

"This person is very composed. I don't know which side he represents. I need to call headquarters to check. We can't let him ruin things."

David Smith was extremely cautious.

Since the subprime mortgage crisis in 2007, they have been accumulating shares with the aim of waiting for the relaxation of financial controls in mainland China and the listing of index futures on the exchange, so as to drive up the price of A-shares and short sell them to make a profit.

The sudden appearance of the "mysterious financier" somewhat disrupted their plans. Or rather, David Smith couldn't tolerate any changes and was eager to know the other party's identity.

……

And at the same time.

the other side.

A courtyard house in Yanjing.

When Cheng Hongfa received the call from the State Financial Regulatory Commission, his expression immediately turned serious, and he nodded repeatedly, saying, "Okay, okay, no problem, okay, I understand."

After hanging up the phone, he immediately jogged over to Bao Xingwei, who was fishing, and reported, "Mr. Bao, the Financial Regulatory Bureau said that a mysterious short seller has appeared in Hong Kong Island, placing hundreds of millions of orders for China Unicom and opening option contracts. It may be that foreign capital is making a comeback."

"China Unicom?"

Bao Xingwei thought the name sounded familiar; it seemed like the ticket Zhang Yang had bought.

“Yes, China Unicom.” Cheng Hongfa suddenly had a flash of inspiration and guessed, “Could it be that Zhang Yang’s doing again?”

"..."

Bao Xingwei fell silent.

After a brief moment of thought, he couldn't help but wonder, "Could it be that short selling isn't allowed in mainland A-shares, so they've gone to Hong Kong stocks to short sell? But what's their basis for short selling?"

Seeing Bao Xingwei remain silent, Cheng Hongfa added fuel to the fire, saying, "If it really is him, then Zhang Yang truly lives up to his name—flamboyant, arrogant, and especially good at causing trouble for others."

"There's nothing shameful about profiting within the rules, but I don't understand why he was so certain that China Unicom would fall."

Bao Xingwei looked puzzled.

Does Zhang Yang have connections within China Unicom?

That shouldn't be the case!
Assuming that person is indeed flamboyant and truly has connections within China Unicom to provide insider information, Hong Kong stock market financial institutions can also obtain insider information, and even more accurately.

If there were any hidden risks at China Unicom, financial institutions would not sign option contracts with Zhang Yang if there were any issues with the information.

After thinking it over carefully, Cheng Hongfa responded to Bao Xingwei, "Is it possible that Zhang Yang reached an agreement with a foreign institution and deliberately lost money to them in order to achieve a legal transfer?"

(End of this chapter)