The largest options trade on the tape today is an opening purchase of 100,000 of the FXI Jan 37 strike calls for 38 cents when the etf was $35.60, amounting to $3.8 million in premium. This trade breaks-even at $37.38, up 5% from the trading level in less than a month on Jan expiration.
The trade in the FXI, which is the IShares China Large-Cap etf that tracks the FTSE 50 China 50 Index which is made up of H-Shares trading in Hong Kong, gave me the opportunity to check-in on Chinese stocks, a source of a ton of volatility for global risk assets for the first 9 months of the year.
First things first. Lets look at the Shnaghai Composite, which the stocks listed on it are consisted of A-Shares, and until a recent “connect” started late last year was very hard for outside investors to get access too. Once the “connect” was in place, it set the stage for the Shanghai Comp’s 70% ramp from mid February to its highs in late June, until its fairly sudden reverse mid year, and the index’s subsequent collapse of about 45%, until finding its footing in late September:
The Shanghai Comp is still up about 12% on year.
Which leads me to the Hang Seng, the H-Share index in Hong Kong which is largely made up of State Owned Enterprises (SOEs), largely industrial and financials, which the FXI more closely tracks. The Hang Seng had a nice rally in Q1, but much more subdued than the Shanghai Comp of only about 20%. The Hang Seng topped out before the Shanghai Comp and is now down about 24% from its June highs, and down 8% on the year:
And the FXI, which looks a lot more like the Hang Seng chart than the Shanghai, which is down 33% from its 52 week high made in April and down 12.5% on the year, and now once again approaching important technical support at $35:
I’d make one last point about the options trade. Obviously we have no idea what the trader’s intent was, could it be a stop loss on a short position in the etf, leveraging an existing long position, or just a new outright punt on a sharp bounce out of 2015 and into the new year? Who knows, but in volatility terms, the calls that were bought appear to be cheap(ish) with 30 day at the money implied vol at about 25%, down about 50% from its 52 week highs, and below the one year average close to 28%:
If the trade is an outright bullish bet, then a quick gander at the 8 year chart shows just how important it is for the etf to hold $35 in the near term, and why defined risk leverage bets to the upside could be preferable to long stock: