Record options volume in Tencent Ltd. sees rally fortunes fade

The People’s Bank of China (PBOC) issued a statement Friday calling for a halt to online virtual credit card use. The statement made to China CITIC Bank Corp. caused a 6.4% slide in shares to Hkd$565 for Tencent Holdings Ltd., which operates virtual credit cards in cooperation with CITIC. Shares in CITIC were suspended.

The move from the PBOC aims to tighten restrictions across online financial products. The suspension of so-called “quick response” codes is aimed at consumer protection but may have been the result of political lobbying from larger lenders as ecommerce names attempt to grab for market share.

Tencent said Wednesday that it was launching a credit card following Alibaba’s earlier announcement that it was launching a virtual card of its own that could be used to buy goods online through affiliate Alipay.

The PBOC's main concern appears to be the risk calculations employed in the roll out of the cards, which has been modeled by Tencent and Alipay. After its disruption the PBOC may ultimately allow the roll out of online payment methods under conditions of heavier regulation.

Next week Alibaba is due to launch one million cards offering a minimum of 200 yuan ($33.00) in credit to users. Alibaba and other internet companies are intensifying competition in ecommerce markets as they attempt to expand their offering of financial services, causing angst at the central bank. The PBOC remains concerned over security of verification procedures and has asked both companies to provide detailed reports about their products.

This week’s dual announcement of the launch of credit cards using QR bar codes scanned by smartphones to process online payments, are achieved through partnership with China CITIC Bank. Growth in online and mobile payment transactions has moved extremely fast and according to McKinsey & Co. forecasts will see China overtake the United States as the world’s largest online retail economy by the end of 2014. 

Slide in Tencent induces record options trading volume.

Shares in CITIC fell 7.1% before being suspended. As for trading in Tencent, volume reached 13.7 million shares for the highest tally in one year. As for options on the name, volume popped to 79,394 contracts--a record for the name--and was almost equally split between calls and puts, with just 3,000 fewer calls trading than puts. The chart contrasts the current Probability Distribution caused by the downturn in expectations for Tencent with an estimate of its earlier week reading.

The red bars replicate the Distribution earlier in the week as the stock popped to Hkd$640. At that time the options market indicated a 25% likelihood that shares in Tencent would close out the month of March above Hkd$680 per share. The blue Probability Distribution reflects current option pricing and infers those odds have shrunk to just 6%. Traders can use the IB Probability Lab to input their own assumptions regarding improving or worsening prospects for companies in order to generate option based strategies reflecting their views. 

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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