Use Options to Play China’s Resurgence

by Tyler Craig | October 12, 2012 11:55 am

Use Options to Play China’s Resurgence

While the bears have staged a successful mutiny here in the U.S. equities market, it appears the bulls have wrested complete control in China. The nascent strength in the iShares FTSE/Xinhua China 25 (NYSE:FXI[1]) has provided a boost to the emerging markets complex, helping it to stay afloat the past few trading sessions while our market has been sinking.

1012 FXI 300x166 Use Options to Play China's Resurgence
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A brief survey of FXI reveals a hat trick of bullish developments: a breakout, relative strength and accumulation. FXI spent its summer mired in a $3.50 trading range. Every advance was met by stiff resistance in the $35.50 zone — until yesterday, when it developed a breakaway gap that cleared both resistance and the 200-day moving average.

The upturn in FXI also led to a marked change in relative performance. As shown by the green Comparative Relative Strength (CRS) study at the bottom of the chart, FXI had spent all of 2012 exhibiting relative weakness vs. the S&P 500 Index. The recent breakout, however, has led to a trend change in the CRS, revealing the FXI’s newfound outperformance.

Finally, Thursday’s breakout along with the initial surge off the early-September lows occurred on above-average volume. The elevated volume helps confirm the validity of the breakout, as does the institutional accumulation that preceded it.

With the bulls now reigning in China, traders might consider initiating a December 35-37 bull call spread for $1.10 or better. To initiate the position, buy the Dec 35 call while selling the Dec 37 call. The maximum risk is limited to the initial $1.10 debit and will be incurred if FXI sits below $35 at December expiration. The max reward is limited to the distance between strikes minus the net debit, or $0.90, and will be captured if FXI can rise above $37 by expiration.

At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.

Endnotes:
  1. FXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXI

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