The Massive Options Bet on Big-Cap Chinese Stocks – Schaeffers Research (blog)

The iShares China Large-Cap ETF (FXI) has been swinging higher since hitting its most recent low of $33.91 on Dec. 23, up nearly 18%. After notching an annual high of $40.70 on June 8, the exchange-traded fund (ETF), which provides exposure to blue-chip stocks in China, pulled back to a trendline connecting a series of higher lows since December. And with FXI trading back near the $40 level, one options trader on Wednesday seemingly bet on the fund to stage a big move — regardless of direction — from this round-number mark.

Specifically, two symmetrical blocks of 12,000 July 40 calls and puts changed hands simultaneously on Wednesday afternoon. The calls were apparently bought to open for $0.45 apiece, while the puts were purchased for $0.90 each. Open interest translations overnight confirm new positions were initiated, making it safe to assume a long straddle was created for a net debit of $1.35 per pair of contracts. Accounting for 100 shares per contract, this equates to an initial cash outlay of $1.62 million.

The net debit paid is also the most the options trader stands to lose, should the fund remain stuck near $40 through expiration at the close on Friday, July 21. Profit, meanwhile, will accumulate on a breakout above the upper breakeven rail of $41.35 (strike plus net debit) or a breach of the lower breakeven rail of $38.65 (strike minus the net debit). 

Since the long straddle requires the purchase of two options — or “double premium” — the speculator may have also been hoping to take advantage of the fund’s low implied volatility levels. FXI’s Schaeffer’s Volatility Index (SVI) of 14% is docked in the low 14th annual percentile, meaning short-term options are attractively priced at the moment, from a volatility perspective. 

Today, FXI call options are trading at six times what’s typically seen at this point in the session, with 51,000 contracts on the tape. Most of this is due to a nearly 37,000-contract block of weekly 6/23 40-strike calls that crossed earlier at the bid price of $0.07. It’s hard to tell whether these calls are being opened or closed ahead of tomorrow’s expiration, though, especially considering a similar-sized block was bought to open last Friday.

Looking ahead, FXI shares are heading into a historically positive month of trading, according to data from Schaeffer’s Quantitative Analyst Chris Prybal. Since its inception, the fund has averaged a July gain of 3.5%, second only to April. And despite a sharp sell-off in Chinese banks and social media stocks today, the fund is trading up 0.9% at $39.84.

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