BETTING ON A TURN AROUND IN CHINESE SHARES
Someone thinks the sell-off in China is overdone and they’re putting their money behind that bet. An institutional trader was seen making a sizable bet on the FXI, the China ETF, on the back of a nearly 15% correction that has taken the fund down in 9 of the last 11 sessions:
FXI – iShares FTSE/Xinhua China 25 Index Fund – Shares of the exchange-traded fund, which invests in twenty-five of the largest and most liquid Chinese companies, are down 0.75% to $38.27 with just under one hour remaining in the trading session. FXI’s share price has declined nearly 15% in the past few weeks, from a 2010 high of $44.53 on January 6, 2010, down to an intraday low today of $37.89. One option trader’s actions in the March contract today suggest he has had enough of the downturn, and is looking for a sharp rebound by expiration in two months. The investor initiated a three-legged combination play using both calls and puts on the fund. It appears the main portion of the trade is a ratio-bullish risk reversal involving the sale of 5,000 deep in-the-money put options at the March $41 strike for a premium of $3.66 each, spread against the purchase of 10,000 calls at the same strike for $0.70 apiece. The purchase of 10,000 puts at the March $35 strike for $0.85 each rounded out the third leg of the transaction. The investor pockets a net credit of $0.56 per contract on the trade, which he keeps if shares rally up to $41.00 by expiration. Additional profits accrue to the upside if shares bounce 7.15% higher to surpass the $41.00-level. The 10,000 put options at the March $35 strike serve as a buffer against losses in case shares of the FXI do not improve in the next couple of months. The investor risks having shares of the underlying put to him at an effective price of $40.44 each should the March $41 strike puts remain in-the-money through expiration, and the March $35 strike puts land out-of-the-money.
Source: IB
I have been watching Chanos advertise (nearly everywhere) his “short China” position. He did the same thing at the same time last year with “short healthcare.” I know little about his track record other than his wonderful abilities to spot fraud especially companies that are cooking the books. Not sure I totally agree with him on these sector short bets though. Betting against China is hazardous and obviously better against healthcare costs rising was a joke. Next maybe he’ll bet against the insurers, thinking perhaps our premiums will go down.
Looks like his bet is paying off – China and Hong Kong are both up big time so far today.
what is this, someone trying to get long 415,000 deltas in the cheapest up front way possible? i wonder what the trader’s margin is on this package. his biggest loss on the downside is 2.7 million, but if it went there tomorrow he would probably only lose around 500k. if you assume that his margin is around that level of 500k, he has gained about 31X leverage (he has exposure equal to about 16M worth of FXI for 500k margin). not bad.
The four decades bull market of Hengsheng has topped out in 2007. We will see 5K in next a few years. As for Shanghai, parabolic top at 6200 will remain intact for generations.
I know little about Chanos until he makes headline of his bets against China. Regardless his fundamental analysis (very sensible by the way), you ought to respect someone who makes big money by shorting stocks in a sea of liquidity.
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