Play the Dive in the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI)

Advertisement

Chinese stocks finally ascended close enough to the sun to receive the Icarus treatment. Shares of Wall Street’s favorite China ETF — the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI) — are tumbling 5% lower in early trading today.

Profit Taking Hits the iShares FTSE/Xinhua China 25 Index (ETF)The Claymore/AlphaShares China Small Cap ETF (NYSEARCA:HAO) is suffering a down gap of similar magnitude.

Trading veterans shouldn’t be surprised by the sharp downturn. Given the lofty perch of Chinese stocks after such an epic run, the bulls were bound to receive their comeuppance at some point.

And that point, as it turns out, was today.

Despite what’s turning out to be quite the one-day bloodbath, the reality is the uptrend in FXI is well intact. The China ETF remains above all major moving averages, and its trend structure is sound. So while today’s swan dive undoubtedly marked a short-term top in the fund, it remains to be seen if we’re experiencing a larger trend change.

fxi china etf
Click to Enlarge
Source: OptionsAnalytix

Embrace the FXI Volatility

If you’re a believer in the FXI bull run, you should be eying the current pullback as a buying opportunity. With implied volatility remaining elevated, short option strategies are the way to go here.

The premium of out-of-the-money options is elevated enough to make selling credit spreads an attractive proposition.

Sell the May $46/$43 put spread for 34 cents or better. The reward is limited to the initial 34-cent credit and will be captured if FXI can remain above $46 for the next month.

The max risk is limited to the distance between strikes minus the net credit, or $2.66, and will be lost if FXI falls below $43 by expiration.

Now, 34 cents may not sound like a lot, but compared to the risk of $2.66, it represents a potential return on investment of 13%, which is not too shabby for a one-month, high-probability play.

In timing the entry, consider waiting for signs of a bounce. If FXI continues plumbing the depths today, it might be worth waiting to pull the trigger.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

More From InvestorPlace

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2015/04/play-the-dive-in-the-ishares-ftsexinhua-china-25-index-etf-nysearca-fxi/.

©2024 InvestorPlace Media, LLC