Circumstances off and on the price chart dictate it’s time to climb a great wall of worry in the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI). But don’t sweat it. Investors wanting to purchase the FXI ETF can avoid any truly taxing trades using a less costly and risky bull call spread in lieu of owning shares. Let me explain.
As anyone who watches the nightly news, browses the front page of a national newspaper or gets their fill of what’s going on internationally on Facebook (NASDAQ:FB) knows, the good ol’ U.S. of A is in a trade war with China. Maybe. And so far, the political boxing match has taken its toll on the FXI ETF.
Shares of FXI have peeled off 22% over the past five months, and for what it’s worth, that officially puts it into a bear market. The ongoing pressure this year has, of course, been tied to escalating worries by investors that the Chinese economy will increasingly struggle due to a trade war with the U.S.
Most recent and reinforcing fears of a slowdown — or something more menacing — China’s June purchasing manager index or PMI readings revealed falling export orders. As well, the government’s move to impose property controls to diffuse an overheated market and efforts to deleverage through new regulation have also helped pressure China’s economy and, in turn, shares of FXI.
Bottom line, China and FXI stock are facing a great wall of worry on and off the price chart these days. But as more seasoned market watchers are aware, it’s when conditions like those facing FXI today appear their most menacing that opportunity lurks beneath the surface.
FXI ETF Monthly Chart
Looking at FXI’s monthly chart, today’s so-called and recently confirmed bear market is now actually looking interesting from a contrarian’s point of view. In fact, the only thing I’d be a seller of right now is the news itself.
Don’t get me wrong, I’m not suggesting today’s headlines are fake news. But as an investor, by looking past a blanket label such as “bear market” and instead focusing on the price action since FXI began dropping in early 2018, there’s reason to be optimistic.
At the end of the day, I’m much more agreeable with embracing a confluence of Fibonacci, a stealthy uptrend and a nearly oversold monthly stochastics — which are coming together to give bullish contrarians an investing edge. However, with no guarantees in the stock market, or the FXI ETF for that matter, using an appropriate, reduced and limited-risk options spread is the right kind of climbing gear for the situation.
FXI ETF Bull Call Spread
Reviewing the options board on the FXI ETF and given what has been discussed, I’m favoring the Oct $46/$50 call spread for 55 cents with shares at $42.50.
This particular out-of-the-money vertical requires FXI to move higher on an expiration basis in order to break even at $46.55. And in order to capture its max profit potential of $3.45, it must climb above $50, which probably seems unfathomable right now given the market’s current sentiment towards investing in China.
Yet with this strategy’s risk contained to a relatively tame 1.3% of FXI, the October contract allowing for plenty of time and additional wiggle room (if necessary) for our trio of technical friends to find investors changing their tune and as they most often do — this looks like a smart way to begin climbing today’s wall of worry in China.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits.
Legendary Investor Louis Navellier’s Trading Breakthrough
Discovered almost by accident, Louis Navellier’s incredible trading breakthrough has delivered 148 double- and triple-digit winners over the last 5 years — including a stunning 487% win in just 10 months.
Learn to use this formula and you can start turning every $10,000 invested into as much as $58,700.
Click here to review Louis’ urgent presentation.