Two China Trades, A Win and a Wait (FXI, FB, SPY)

Two China Trades, A Win and a Wait (FXI, FB, SPY)

We have a number of trades to close out today, and we’re happy to report some very pleasant results, too.


Let’s get right to it.


We start with our July 15th initiative from a letter called Don’t Get Married to a Chinese Bear. There, we recommended you open a spread using Facebook (NYSE:FB) and the iShares China Large-Cap ETF (NYSE:FXI), whose details went like this:


We urged you to buy the FXI October 41 PUTs for $1.77 and sell the FB October 82.50 PUTs for $1.70. Total debit on the trade was $0.07 per pair.


And here’s the way it looks today:


The FXI PUTs are worth $5.15 and the FB PUTs go for $2.28. Sell the former and buy back the latter for a gigantic gain of $2.87 on just seven cents expended!

That’s insane, Larry!


Damn right.


Your gain is 4000% in six weeks or 36,000% annualized.


Go call your doctor.






Next up is the August 4th trade from Sweep and Cover; The Market Gets Coiffed, in which we told you to purchase FB March 115 CALLs for $2.75 and sell SPY (S&P 500) March 222 CALLs for $2.79. Your credit was $0.04 per pair traded.


And today?


Well, despite a steep market selloff, FB is still fetching a buxom $2.23, while the SPYs only get you $1.50.

Take it easy – BUT TAKE IT!


We’re recommending you close the trade here, for a number of reasons.


First, your profit is $0.77 (73 + 4) on an initial credit. That is, you spent nothing and made off huge. And if, like reader Tom Arsenault, you traded a dozen or more pairs, you’re now the proud father of a giggling gaggle of green. Figuring for a cheap round of commissions, we’re calling the gain 413%.


Why else?


The usual… Murphy’s Law.


In the options game, you can count in it happening every blue moon at least, if you’re not careful. Something will go wrong and upend you from your perch. In addition to employing hedges and safeguards at every turn, it also behooves us just to act when we have a nice profit in hand. Avoid being greedy. It’s the greed mindset that kills, friends. Take your money here, and run.

A Look Back at China


Without offering anything by way of a preface – we simply got our June 1st trade wrong. And it now requires your attention.


The letter was called China at New Highs? Buy China, and therein we exhorted the long term benefits of owning the Shanghai market. Specifically, we wrote –

And because China apparently has more room to bubble-up than the United States – despite its already vertical twelve month climb – longer term  [investment]  prospects for that country may be superior to our own. For that reason we would lean toward the speculative purchase of a very long-term CALL on the Chinese index, and the easiest way to play it is via the iShares China Large Cap ETF (NYSE:FXI)…


It was with that in mind that we bought the January (2017) 51 CALL for $5.20, and we hold by the righteousness of that aspect of the trade.


The problem arose when we sold PUTs to offset our costs. You’ll remember that we sold


1) the June 44 PUT for $0.22,

2) the July 44 PUT for $0.48,

3) the August 44 PUT for $0.81, and

4) the November 44 PUT for $1.56.


Total debit on the trade was $2.13.


And today?


Today, China has sunk 25% from the day we issued the recommendation and has struggled to bounce higher.


In the meantime, the June PUTs expired worthless, while the July and August PUTs expired in-the-money, forcing us to buy two board lots of FXI at $4400 each. That’s $8800 on top of the $213 that we spent to open the bet, which means we’re net debit $9093, sitting on 200 shares of FXI, an open long CALL and an open short PUT.


So what do we do?


Let’s consider our options.


If we close out everything today, we’re looking at a $1600 hit, which doesn’t make a lot of sense, considering that we’re still bullish on China for the long haul and our shares and open CALL offer us exposure to that prospect.




Or, we can reverse the trade – sell our shares, close the options and go short FXI – a plan that might work, but since we don’t believe in it, there’s little sense even entertaining such a notion.


The third option is to have patience, sell CALLs against the existing shares that we hold, and generate some cash from a covered CALL strategy. That way, we recoup our losses over time, even as the shares gain value and we maintain the possibility of cashing in on the long-dated CALL over the next seventeen months..

How do we do it?


Before we give you the fix, let’s look at the chart to get our bearings. This is FXI for the last six months.




There’s no gainsaying it, China got wham-doggied these last four months, falling nearly 40% peak-to-trough before bouncing higher off its bottom last week. FXI is now 10% above its lows and it’s an open question what will happen next.


On the one hand, according to the stock’s RSI (in blue), we’ve been oversold twice in the last ten weeks, and that in itself should constitute solid grounds for a turn higher.


On the other, we don’t see a enough volume here to indicate that a bottom is in. And while it could be that the real turnover of shares occurred in China itself, where the selloff was a waterfall and the volume spectacularly mountainous, we’re not willing to write off the dearth of trade on FXI stateside just yet. There could be more downside.


The Trade


That said, we’re going to write a covered CALL program using the September options, to start.


Wall Street Elite recommends you 1) close your FB/FXI spread as outlined above, 2) close your FB/SPY spread (as above), and 3) consider selling two FXI September 25th 37.50 CALLs for $0.87 each. Your credit is $174.


With kind regards,


Hugh L. O’Haynew, Senior Analyst, King of the Options Ring…

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