Insights 
VT 
A storm warning has been issued in Hong Kong, but it is not expected to affect trading. The Hong Kong Observatory has released an Amber Rainstorm Warning Signal Special Announcement.
Hong Kong’s rain warnings are categorised into three levels: Amber, Red, and Black. An Amber alert suggests potential heavy rain that may escalate to the severe Red or Black levels. Flooding may occur in low-lying areas, prompting key agencies and services to be on standby.
Severe Weather Response Levels
Red and Black warnings signify heavy rain capable of causing road flooding and traffic disruptions. These warnings trigger full-scale responses from relevant government departments and service providers to manage severe conditions.
Currently, the Amber alert will not disrupt trading activities. Since 2024, Hong Kong’s securities and derivatives markets, including Stock Connect trading, derivatives holiday trading, and after-hours trading sessions, continue to operate based on the pre-determined trading calendar, even during severe weather.
Based on the new policy, we should disregard the risk of a market shutdown, which was a primary factor in the past. Our focus now shifts to the secondary effects of the storm, such as its impact on economic activity and investor sentiment. This change means we are trading the market’s reaction to the disruption itself, not the administrative decision to halt trading.
Market Impact and Volatility
We anticipate a rise in implied volatility should the Observatory escalate the warning. With the Hang Seng Index already experiencing swings of over 5% in the last month due to economic policy news from mainland China, a severe weather event could act as a catalyst for another volatility spike. We are positioning for this by looking at purchasing straddles on the HSI futures, betting on a large move in either direction.
We are also identifying sectors that will be directly hit by flooding and transport disruption. Given that Hong Kong’s retail sales saw a significant 14.7% year-on-year drop in April 2024, we believe consumer-facing stocks and property management companies are particularly vulnerable to further negative pressure. Put options on these specific equities appear to be an effective strategy for the coming days.
A key unknown is market liquidity during a potential Red or Black storm signal. Even with electronic trading, we suspect many institutional and retail traders will be preoccupied with personal safety, leading to thinner order books. This low-volume environment could exaggerate price moves, creating sharp, unpredictable swings that we must be prepared for.
Historically, the market often staged a relief rally after a typhoon passed and exchanges reopened. Under the new arrangement where the market never closes, this clear catalyst is gone. We expect a more prolonged period of negative sentiment that mirrors the duration of the storm’s impact on the city, rather than a sharp V-shaped recovery.
