Institutional Derivative Hedging Reshapes A-Share Volatility Characteristics and Implications for Individual Investors' Strategies

• Short-selling and hedging mechanisms reduce the amplification effect of panic selling.
  The recent “sudden sharp drop” in A-shares is not simply a result of funds fleeing from spot markets; it is the outcome of game-playing between leading securities firms in the index futures/options market as they compete for the qualification to issue A500ETF option underlying assets. On one hand, they suppress volatility by short-selling and hedging long positions; on the other hand, they can quickly amplify directional momentum when basis changes drastically. Thus, the market shows a US-style rhythm of “sharp drops (suppressed) + slow rises (trend reversal relies on position closing + additional capital inflows)” [1].
• Stock index futures basis reflects institutional hedging intensity.
  The long-term deep discount of IC/IM contracts stems from institutions’ tendency to use CSI 500/1000 futures to hedge spot positions. Once the discount exceeds a reasonable threshold, the hedging effect weakens; conversely, when the discount narrows rapidly or even turns into a premium, it often indicates that institutions are accelerating short covering or switching to long positions, thus becoming a leading signal for index rallies [1][4].
• Combination of ETFs and Options Forms a New Market Anchor.
  A500ETF is becoming the core underlying asset in the “option battle”. Regulators encourage long institutions to build positions and hedge simultaneously in ETFs, options, and index futures, enabling them to carry both liquidity and hedging functions. Once options are concentrated in a certain price range (e.g., A500 options are dominated by large securities firms), the market will show a “pegging” effect in that range, thereby suppressing volatility or even redefining short-term support/resistance levels [5].
• Thus, A-share volatility characteristics are evolving toward ‘institutionalization and rhythmicity’:
  Rare large-scale drops may result from the resonance of natural volatility and suppression strategies, but since institutions have tools like options/index futures, the bottom will not be amplified by retail investors’ disorderly selling, leading to structured volatility with rapid declines, slow rebounds, and slow trend shifts.

• Institutional share continues to expand, retail share weakens but activity remains high.
  Estimates of A-share investor structure in 2025 show that institutional investors (general legal persons + professional institutions) hold more than 60% of shares, with medium- and long-term funds such as public funds, insurance, and pension funds continuing to increase positions; retail investors account for about 30% but still have high trading frequency and indirect influence [6]. This structure makes the market increasingly insensitive to fragmented information, and more dominated by the rhythm of institutional ETF/option activities.
• Scale of index products surges, providing greater ‘capacity’ for institutional hedging.
  The total size of ETFs exceeds 5.8 trillion yuan, index investing is growing like mushrooms, providing underlying assets for spot hedging in derivative strategies. Moreover, ETFs themselves have the characteristics of ‘disclosure + liquidity + convenient arbitrage’, which is conducive to institutions’ allocation and rebalancing between different products [3].
• Under the policy tone of ‘stability’, institutions prefer to use derivatives to resolve unexpected volatility.
  In the context of ‘stable growth + targeted monetary policy’, regulators encourage improving market stability through the coordination of indices, ETFs, and options (e.g., expansion of A500ETF options), enabling institutions to quickly adjust positions during macro disturbances, replacing traditional retail investors who passively liquidate positions due to panic [2][5].

1. Align with institutional rhythm, reconstruct risk management framework
   • The existing “high-frequency gaming” is no longer the main theme. It is recommended to take ETFs/broad-based indices as the core of allocation, use options or index futures for volatility hedging and profit locking (e.g., matching A500ETF options with protective puts or covered calls).
   • When the discount of IC/IM contracts narrows rapidly, it can be judged that institutional hedging pressure is weakening, or it implies potential index rallies. At this time, short-term participation needs to be accompanied by quick profit-taking/stop-loss.

2. Start from valuation anchoring and certain directions
   • Institutions are preferring certain opportunities with ‘profitability, industrial support, and policy backing’ (such as high-end manufacturing, digital economy, etc.). Retail investors should strengthen fundamental screening to identify core assets that truly benefit from valuation repair, rather than chasing liquidity-driven themes.
   • Combine ETFs and active funds to observe standard deviations and tracking errors, and use these tools to achieve diversified and structured allocation through ‘indexation + selection’.

3. Enhance one’s perception of ‘derivative rhythm’
   • Pay attention to key variables such as index futures premium/discount, option implied volatility, ETF premium/discount, etc. Use public data to judge whether institutional hedging positions are expanding/contracting, adjust positions in time, and avoid being swept out during the ‘sharp drop’ phase by institutions.
   • If you lack experience in derivative trading, you can simulate institutional hedging through option substitution functions (e.g., ETF + option linkage); at the same time, strengthen psychological adaptation to the ‘slow bull rhythm’ to avoid chasing gains in the early stage of rebounds or panic selling during rapid drops.

4. Choose stable ETFs or broad-based indices for long-term allocation, then leverage dollar-cost averaging (DCA)/regular rebalancing
   • Under the indexation trend, ETFs such as A500 and CSI 300 have low fees and high liquidity, which can serve as the backbone of structural equity exposure. Then, combine DCA or rebalancing discipline to reduce timing risk, and match cash or ‘fixed income +’ tools to cope with volatility.

Overall, A-shares are gradually shifting from retail-dominated to ‘institution + derivative rhythm’ dominated. Individual investors should reconstruct their portfolios along the three main lines of ‘fundamentals + toolization + risk management’, while maintaining perception of derivative rhythm and appropriate defense, to move forward steadily in the new normal of ‘sharp drops and slow rises’.

[1] NetEase Finance - “Sudden Sharp Drop: Someone Intentionally Suppresses A-Shares from Rising” (https://www.163.com/dy/article/KHP5U8J1055281I1.html)
[2] East Money - “The Stock Market Will Focus More on Certain Directions in 2026” (https://finance.eastmoney.com/a/202512273603568940.html)
[3] East Money - “Public Fund Industry in 2025: Twelve Key Words for the Reform Year (Part 2)” (https://biz.eastmoney.com/a/202512233599649177.html)
[4] Sina Finance - “Market Sentiment Stabilizes; Discount of Main Contracts Narrows [Stock Index Dividend Monitoring]” (https://finance.sina.com.cn/roll/2025-12-18/doc-inhceprt8703387.shtml)
[5] Toutiao - “‘Hardcore’ Data on Development! China’s Public Fund Market Achieves Historic Breakthrough in ETFs” (https://www.toutiao.com/article/7586876037854757418/)
[6] East Money - “Proportion of Retail Investors in A-Share Market by Number and Capital Volume” (https://caifuhao.eastmoney.com/news/20250824214141911949940)