An options approach may be the best way for investors to play the recovery in Chinese stocks after the notoriously volatile stock market there has boomed to start 2023, a ccording to Barclays. Equity derivatives strategist Stefano Pascale said in a note to clients Wednesday that investors should maintain some skepticism about Chinese stocks and exchange-traded funds, which have outpaced their U.S. counterparts this year after China lifted its zero-Covid policy. "While China's reopening is undoubtedly a turning point, there remain reasons to be cautious, as Zero Covid was only one of a host of challenges facing China's growth prospects in 2023," Pascale said in the note. One way to get some exposure to the uptrend while limiting potential risk is through a call spread on a Chinese-focused ETF, like the KraneShares CSI China Internet ETF (KWEB) , Barclays said. The fund is up about 10% year to date. "We still recommend monetizing the China re-opening trade via options, and note that among China-related ETFs, call spreads are the most attractive on KWEB, given the relatively flat call skew," Pascale added. KWEB YTD mountain KWEB is off to a hot start in 2023. A call spread consists of buying one call option and selling another one at a higher strike price. The idea is to capture a limited amount of the potential upside for a stock or ETF while reducing the upfront cost of the trade, thanks to the premium earned by selling the call that is further out of the money. The downsides of the trade is that if the underlying stock or ETF really takes off, then the investor will miss out on the additional upside above the higher strike price. Additionally, the call with the lower strike is likely to be more expensive, which means there will be some net upfront cost to the trade. An options approach could make particular sense for Chinese tech stocks because of the recent swings in the sector, sparked by regulatory developments, which creates more risk for holding the underlying assets. Chinese regulators have previously been skeptical of fast-growing tech companies, though their recent decision to allow Ant Group to expand its consumer finance business was viewed by investors as a bullish sign. — CNBC's Michael Bloom contributed to this report.
