ANALYSIS: Flurry of China tech derivatives activity post-DeepSeek launch – Saxo
25th February, 2025|Gregory Rosenvinge
The release of low-cost Chinese artificial intelligence (AI) chatbot DeepSeek last month has driven demand for Chinese tech equity derivatives, according to Saxo, as investors are pulling back from US tech stocks.
In an interview with FOW, the European bank said the prospect of overvalued US tech stocks and cheaper, innovative Chinese competition is driving heightened activity in tech equity derivatives markets. Investor confidence in the US leading global AI innovation has taken a hit from the challenge of DeepSeek to ChatGPT, which was launched by Silicon Valley-based OpenAI in late November 2022.
“There’s definitely been a noticeable shift in options activity around Chinese tech stocks since DeepSeek launched. The AI buzz has fueled a strong rally in names like Alibaba and Tencent, and we’re seeing that reflected in the derivatives market – especially in exchange-traded fund (ETFs) like KraneShares CSI China Internet Fund (KWEB),” said Saxo options strategist Koen Hoorelbeke.
“The biggest trend has been a huge increase in call buying on China tech ETFs. Open interest in KWEB calls has more than doubled from January lows, putting it near levels we last saw in the October rally. Options flow suggests traders are positioning for more upside rather than just locking in profits. There have also been large call spreads and structured trades, including some interesting ratio spreads and calendar spreads, which indicates a mix of bullish positioning and risk management.”
Following the recent focus on DeepSeek and concerns that US tech stocks may be overvalued, AI chips giant Nvidia’s stock price is down 9% over the past week in New York. Chinese tech firm Alibaba was up 11% in Hong Kong since its results on Thursday last week until markets closed on Monday. On Tuesday, the stock declined 4% as investors retreated due to concerns US president Donald Trump is seeking to toughen predecessor Joe Biden’s semiconductor chip controls over China, before regaining ground on Wednesday up 5%.
“We’ve seen these kinds of surges in Chinese tech before, and past rallies have often faded after sharp run-ups. Some strategists are already flagging that risk. But there’s also a new element this time – the AI narrative and the broader US-China tech arms race. That’s adding some right-tail risk (potential for bigger upside moves) that wasn’t as pronounced in previous cycles,” said Saxo’s Hoorelbeke before the investor pullback on Tuesday.
“So overall, the options market suggests US traders are warming up to China tech, but they’re still playing it tactically. The AI angle has definitely brought back interest, but whether this rally has staying power is still an open question.”
Regardless, previous investor confidence in the US as the centre of AI innovation is flagging, with the increased price action in cash equities being reflected in derivatives volumes, as investors look to hedge or increase their exposure to changing tech and AI trends.
Up to and including Tuesday, Hong Kong Exchanges and Clearing (HKEX) has traded 3.6 million contracts of Hang Seng TECH Index futures for February, with three trading days still to go in the month, according to data from the Hong Kong exchange group.
This was up 89% from 1.9 million lots in all of January and up 71% on 2.1 million contracts in all of February last year, according to FOW Data. On Monday alone, HKEX traded 469,133 lots of Hang Seng Tech Index futures, indicating heightened liquidity for Chinese tech stocks.
In the US, Cboe Global Markets has traded this month 54.3 million options contracts tracking the S&P 500 index, which is heavily weighted by US tech’s ‘Magnificent Seven’ stocks, according to Cboe data, with three trading days still to account for in February. This is down 21% from 69.1 million lots in all of January, according to FOW Data.
For Saxo’s Hoorelbeke, he believes the derivatives flow in US tech stocks looks more tactical than the recent flurry of trading in China.
“While US traders are still focused on AI plays – Nvidia, semiconductors, software – their approach seems different. Instead of outright bullish bets, there’s been more relative value trading, such as long China internet stocks vs. short US semiconductor ETFs,” said the Saxo options strategist.
“Volatility pricing reflects that too: China tech implied volume remains elevated, while US tech volume is relatively stable. There’s a bit of a divergence in sentiment – China tech is getting short-term momentum trades, whereas US tech flow looks more balanced.”
Demand for derivatives products was “insatiable” going into the new year, according to a report from Coalition Greenwich published in January, citing interest rates and equity derivatives hitting record volumes in 2024, while AI was a focus at the World Economic Forum annual meeting in Davos also last month.
