It’s time to climb a “great wall of worry” in the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI). However, getting long Chinese stocks doesn’t have to be taxing for investors using a well-placed, low-risk, high-reward FXI long call strategy.
Let’s face it, The Donald may have been an outsider (well, kind of), or more correctly a first-timer in running for office, but he certainly made emotional promises like a veteran politician in making his way into the White House. And for FXI investors, that’s very good news.
To make America great again, one pledge by our President elect is to tax Chinese imports as much as 45% in an effort to even the playing field and get our country’s jobs back, much to the liking of many displaced U.S. workers. But don’t take that jingoist vitriol out on FXI.
The chorus for taxation is emotionally appealing and a 5% to 10% tariff may actually come into play. I’m agreeable with that, but don’t bet against China, the largest emerging market and world’s second largest economy, or against FXI for that matter.
Pragmatically, U.S. factory lights can’t simply be flipped back on with iPhones from Apple Inc. (NASDAQ:AAPL) or athleisure wear from Nike Inc (NYSE:NKE) parachuting down a conveyor belt just as seamlessly.
Unfortunately, and perversely enough, even if the U.S. does eventually win back some of manufacturing jobs, overly aggressive protectionist policies are going to cost consumers a good deal more — not FXI investors.
Whether you like it or not, as a country addicted to “cheap” and short-term quarterly performance reviews, the U.S. doesn’t have the “s-t-a-m-i-n-a” to go at it with China and Trump’s populist tough talk will be reined in or face a very angry Main Street and Wall Street.
FXI Monthly Chart
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Worse yet, FXI looks downright bearish if one focuses on 2015’s failed breakout and what might appear to be a year-long bearish flag that’s just hit resistance from a former support line.
On the flipside, markets are extremely cyclical and given the extreme divergence of the past several years, I believe the only alternative at this juncture is to be a contrarian and go bullish on FXI.
Without having to be too hopeful, I expect FXI’s 2011-2016 double bottom will be confirmed by a price move above resistance near $39-$40 in the next couple months. My view is further supported by FXI having shown relative strength during most of 2016 and now offering traders the opportunity to buy into a minor correction above 200-day simple moving average support.
FXI Long Call Option Strategy
Reviewing the FXI options board, the May $37.50 call is appealing as a purchase given what’s been addressed.
Priced for $1.50 with shares of FXI at $36.05, the call is out-of-the-money by just 4%, and on an expiration basis would break even if the ETF re-tested its year-to-date highs. All in all, that’s quite approachable.
Additionally, by using a May contract, this bullish investor has plenty of time on the calendar without having to fear about contract decay. Net, and coupled with reasonable premiums, this type purchase trumps more than a few alternatives out there and is a smart way to play Chinese stocks for upside.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
