NaughtyPines

ROCK, PAPER, SCISSORS -- FXI OR ASHR?

AMEX:FXI   ISHARES CHINA LARGE-CAP ETF
If you want to play the Chinese markets, you're largely relegated to FXI             or ASHR             . So which do you play from an options standpoint? With IVR             in FXI             at 92 and at a comparable 89 in ASHR             , is it a rock, paper, scissors type of decision? I would say "no," and for a very simple reason: liquidity. While FXI             isn't great from a liquidity standpoint, ASHR             is, quite frankly, horrible, with options spreads exceeding .05 between bid and ask by several factors a great deal of the time. This can not only mean that you're not getting a "fair price" for your option, but also present problems in the event of your having to roll or close the setup at a favorable price.

EXAMPLE:

Oct 16th Expiry FXI             25/28/39.5/42.5 Iron Condor
Max Profit/BPE: .39 credit/contract; 2.61/contract
POP%: 68%
Delta/Theta: .3/.8

Alternative Setups: Oct 23rd 27/39.5 short strangle (.96 credit; undefined BPE; 74% POP; Delta/Theta: -.23/2.88 (look to take off at 50% max profit); Oct 23rd 33.5/33.5 short straddle (4.43 credit; undefined BPE; 51% POP; Delta/Theta: -6.67/4.47 (look to take off at 25% max profit); Oct 23rd 27.5/33.5/33.5/39.5 Iron Fly (3.41 credit; 2.59 BPE; 41% POP; Delta/Theta: -7.97/1.51 (look to take off at 25% max profit).
What would be the best way to capture volatility in the Chinese market then?
Reply
Well, I think FXI is the go-to ETF for the Chinese market, so that would be my instrument of choice to play Chinese market volatility. Ordinarily, I look to enter high volatility environment trades when the ETF has an IV Rank of greater than 35 (six-month ThinkOrSwim). Naturally, the higher the IV Rank, the better, since IV contributes to premium, and richer premium means greater profit. FXI has been quite wild from a volatility standpoint, so I am likely to not enter a trade there until the IV Rank is 70 or more, since it's been in excess of that several times this year (although it remains to be seen whether we'll continue to see that going forward; Chinese markets have taken quite a haircut). Currently, FXI's IVR is 49, which isn't horrible. It's certainly better than the US market index ETF's, which are now all sub 35, but I think the markets have yet to fully digest FOMC. The next few days will give a tell, I imagine ... .
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