Is the China Dragon Running Out of Breath?

Make some quick options gains on China’s slowdown

   

Is the China Dragon Running Out of Breath?

While the U.S. markets have been on a major bull run lately, China has been even hotter, rising 14% year-to-date. But many signs indicate that the temperature is cooling down quite a bit here in the intermediate term.

One of those signs is weak price action in copper, as China and copper prices are highly correlated. With this inexpensive metal being used in a variety of industrial, electrical as well as home-improvement projects, this is a trend worth keeping a close eye on.

China just raised mining taxes, which is a sign that its monetary-easing policy may be ending. Also, expected drops in reserve requirements have not been forthcoming, another sign China may be focusing on inflation more than stimulating growth. Over-construction still looms large, and bad loans are on the rise.

A good way to play China, whether it’s booming or contracting, is through options on the iShares FTSE China 25 Index Fund (NYSE:FXI). FXI consists of 25 of the largest and most-liquid Chinese companies, and is designed to represent the performance of the largest companies in the Chinese equity market that are available to international investors.

FXI shares appear to be stalling at the $40 level, though, with three failed attempts so far to go higher. With Europe still facing headwinds, Chinese growth may be tempered going forward. Given the recent rise in share prices, and technical resistance, I look for FXI to trim in a little at these levels, with the FXI moving back toward $38 by April options expiration.

Based on FXI’s current market price of $40.26 and using a target price of $38, a target date of April 20, 2012, and $1,000 of investment capital, you can capture some nice gains by selling the FXI 39-42 call spread, buying the FXI 42-39 put spread or using another options strategy that best fits your trading style and goals.

For the full details on this trade, visit TradingBlock.com, create a free Instant Login and try the TradeBuilder feature, where you’ll see several ways to trade this name. Best of all, you can see a potential profit-and-loss outline for each strategy.

Create your free login, and get access to the details about these FXI options trading strategies by visiting the TradeBuilder here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/02/is-the-china-dragon-running-out-of-breath-fxi/.

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