Chinese stocks have roared back in a big way.
The iShares FTSE/Xinhua China 25 Index (ETF) (FXI) has rallied 10% off its lows over the past few trading sessions in an epic oversold bounce. While the rebound certainly provided some much needed relief to underwater bulls, it has done little to improve the technical deterioration that has transpired over the past month.
Matter of fact, the sharp turnabout is looking more and more like a dead-cat bounce.
For all its fury, the FXI ETF rebound has failed to lift the ailing fund back above any major resistance levels. The price remains below all its major moving averages, with overhead supply aplenty looming overhead.
The 200-day moving average in particular should give the rally some trouble. From a risk-reward perspective, FXI’s current perch is offering an attractive entry point for bearish plays. Rallies have been sold for two months straight in FXI, and there’s no reason to think the current one won’t suffer a similar fate.
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China ETF Bear Call Spreads
Despite the recent dip in FXI implied volatility, it remains in the upper half of its range making options an attractive sell. The current FXI IV rank is 58%.
Traders looking for a high probability play to exploit the potentially overpriced options could sell the Aug 46/50 bear call spread for 45 cents or better. Consider it a bet FXI remains below $46 over the next month.
The max reward is limited to the initial 45 cents and will be pocketed if the calls expire out-of-the-money. The max risk is limited to the distance between strikes minus the net credit, or $3.55, and will be lost if FXI rises above $50.
To limit the risk, you could exit the trade if FXI lifts above the short strike at $46.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
