Despite Beijing's best efforts, China's main stock indexes <.SSEC><.CSI300> have lost about a third of their value since mid-June, and Chinese shares trading in the United States are feeling the pinch.

Declines in the Chinese market over the last three weeks prompted unprecedented measures, including a collective pledge over the weekend by top Chinese brokerages and fund managers to invest at least $19 billion into the stocks.

The Bank of New York Mellon index of Chinese ADRs <.BKCN> took a turn for the worse on Monday and has dropped 9 percent since Thursday's close. On Wednesday the index was down about 2.8 percent at $428.29.

At the same time, trading activity in options on Chinese stock ETFs have spiked to levels implying all time highs in volatility over the next month.

The drop in the Chinese market has led to some 20 Chinese ADRs falling 20 percent or more over the last month.

"Chinese ADRs will continue to be a dicey thing from day to day and I would not be investing today, but I would pay close attention to how domestic issues are being handled," said Katrina Lamb, head of investment strategy and research at Maryland-based MV Financial. The Chinese economy is still "on a good path," she said.

Notable losers since Thursday's close, include online retailer E-Commerce China Dangdang Inc (>> E Commerce China Dangdang Inc (ADR)), down 23 percent, Twitter-like messaging service provider Weibo Corp (>> Weibo Corp (ADR)), down 20 percent, and Jumei International Holding Ltd (>> Jumei International Holding Ltd(ADR)), down 17 percent.

Shares of Baidu Inc (>> Baidu Inc (ADR)) have fallen about 6 percent since Thursday's close, while security software maker Cheetah Mobile Inc's shares are down 12 percent for the same period.

The recent selloff in both the local market and the ADRs followed a rally of nearly 150 percent from June 2014 to the recent highs in Shanghai.

On Tuesday, E-commerce giant Alibaba Group (>> Alibaba Group Holding Ltd) fell as much as 4 percent to an all-time low of $76.21.

HEAVY OPTIONS ACTION

Traders in the U.S. options market have responded to the market turmoil by beefing up defensive positions in options on China-focused ETFs.

“We have seen a lot of bearish activity in the last two weeks,” said J.J. Kinahan, chief strategist at TD Ameritrade in Chicago.

Options on the iShares China Large-Cap ETF (>> iShares FTSE/Xinhua China 25 Index (ETF)), which tracks large-capitalization equities that trade on the Hong Kong Stock Exchange, have been very busy with the bulk of the activity in puts, usually used for bearish bets.

On Tuesday, the options volume on the ETF surged to 652,000 contracts, or more than four times normal, according to Trade Alert data. Contracts volume was at 449,000, or 2.6 times normal on Wednesday.

Trading in the options on the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF has been similarly busy.

For both ETFs, the 30-day implied volatility, a gauge of the risk of large moves in the shares, has shot up to all-time highs.

"People are overwhelmingly buying protection or placing bearish bets,” said Mandy Xu, equity derivatives strategist at Credit Suisse.

ASHR’s skew, the difference in volatility between a 10-percent out of the money put and a 10-percent out-of-the-money call, is at 25 points, compared with zero about three weeks ago. That shows the sharp uptick in the demand for protection, Xu said.

“It is extremely expensive to hedge right now but people are doing it,” Xu said.

(Reporting by Tariro Mzezewa and Saqib Igbal Ahmed; Editing by Andrew Hay)

By Tariro Mzezewa and Saqib Iqbal Ahmed