New Trade $FXI: Put Put Platter

by Dan August 15, 2013 12:03 pm • Commentary

In the last few weeks the underlying themes on the global macro front have been that Europe  may finally be out of the woods, China is not headed for a hard landing and the U.S. is set for growth that would allow the Fed to take their foot of the easy money pedal.  Of all of these themes, the one that I am most skeptical of is the notion that China might have bottomed.  Here are a few quick reasons why I am inclined to to make a short term bearish bet on the FXI:

-The Shanghai Composite has rallied almost 13% since making new 4 year lows in June, dead cat bounce more likely than sustainable rally given that all major Chinese related assets are still below their declining 200 day moving averages (copper, Aussie dollar, FXI itself)

Shanghai Comp 5 year chart from Bloomberg
Shanghai Comp 5 year chart from Bloomberg

-For all the talk of improved Chinese data, the Citigroup Surprise Index is still negative (below), so Chinese data has been much weaker than the U.S. and Europe on a relative basis.

Citi Economic Surprise Index China, from Bloomberg
Citi Economic Surprise Index China, from Bloomberg

-The new Chinese administration has made it clear throughout 2013 that it wants to shift away from an industrial-led growth model towards more consumption-led growth, and does not mind lower overall growth rates if necessary.  They have not backed off that sentiment, so fixed investment growth likely to remain under pressure

While on a long term basis the Shanghai Composite doesn’t look like a great press on short side playing for a re-test of 2000, the FXI looks to be a tad overbought on the near term.  The chart below shows the etf running out of steam a bit right above prior resistance, and right below the 200 day moving average (yellow).  IN my defined risk trade, I want to target a move back to the 50 day moving average ($34, purple line), a level it was trading at last week:

FXI 2 year chart from Bloomberg
FXI 2 year chart from Bloomberg


TRADE: FXI ($36.25) Bought Sept 36/34/32 Put Fly for .40

-Bought 1 Sept 36 Put for .94

-Sold 2 Sept 34 Puts at .33 for a total of .66

-Bought 1 Sept 32 Put for .12

Break-Even On Sept Expiration:

-Profits of up to 1.60 btwn 35.60 and 32.40, max profit of 1.60 at 34

-Losses of up to .40 btwn 32 &32.40 and btwn 35.60 and 36, with max losses of .40 above 36 and below 32

Risk Chart:

Screen Shot 2013-08-15 at 11.51.10 AM
from ThinkOrSwim

Trade Rationale:  As I said above long term I don’t love the press on the short side, and frankly one more test of the previous lows, and a hold and I would be more inclined to take a shot on the long side vs the SPX.  But on a near term basis I do think we see a one more retest and I want to spend the least amount of premium with a favorable risk reward payout potential.