Big Printin’ – $FXI: Broken China

by Dan January 5, 2016 4:06 pm • Commentary

Back on December 21st we highlighted what was the largest trade across all options exchanges that day. It was in FXI, the IShares China Large Cap etf:

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.

While regular readers know that we don’t highlight unusual options activity as mechanism to generate directional trade ideas, we do find it interesting as a sentiment measure.  Which is why today we are once again highlighting the largest trade of the day in the very same options. When the FXI was $33.95 at 11am a trader sold to close 115,000 of the Jan 37 calls at .045.  So let’s do a little math here to figure out the losses. 33 and 1/2 cents on the initial 100,000 contracts equals a loss of $3.35 million. In about two weeks.

At the time of the original post I had the following to say about the options trade, offering our usual caveat about unusual options activity:

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.

I would echo a similar sentiment as to last month, that out of the money call premium, despite the recent uptick in implied volatility since the etf’s $1.65 sell-off since Dec 21st remains preferable in my opinion to long stock.  While the break-even in the calls was just about even to the downside level where the calls were just sold for pennies, the loss on the calls was far preferable to potential losses of the stock. But it’s still a big loss. And if it against a large short in the etf, the loss may have been less than gains in a short stock position.

Taking another look at the long term chart of the FXI, its apparent that the etf is approaching key technical support just below $33, and a break below could result in an air-pocket to the 2011, down 12% from current levels:

FXI 5 year chart from Bloomberg
FXI 5 year chart from Bloomberg