The back story: On August 15, I bought to open 32 Dec. 15 $44 call options in the iShares China Large-Cap ETF (FXI) FXI on a dip, figuring that with the FXI’s 3:1 edge this summer on the Standard & Poor’s 500 and the SPY would continue during any temporary rally.
That’s what I got out of it; the purchase price was $1.10 per contract and I sold Monday at $1.91, generating nearly a 75 percent profit on a swing trade. In this case, my thesis of looking outside of the U.S. for dip-buying opportunities worked perfectly.
The logic behind the trade: While the 3:1 edge on the S&P was a big deal, I have been watching China plays for a while because the country is opening A shares — the shares that trade within the country – to outside investors, and many index funds will now make the switch, which should give the market a boost during a long transitional period.
Why I sold: With Hurricane Harvey, markets traded on exceptionally light volume Monday, and FXI took a breather from the day-by-day upward move it had made pretty much since I bought those calls. This told me that it was time to take the nice profit and think about buying it back on the next dip.
My worry on this trade all along has been the headline risk coming from North Korea, where China could be squarely in the middle of any conflict. With the North Koreans making more noise over the weekend and into Monday, I’m glad to be out of the trade, but now I am looking for the exact same set-up so I can do it all over again.
What’s next: Buying the dip of an outperformer worked like a charm, and the situation here remains the same, so I am looking for another dip. I’ll be placing a bid for 20 contracts at $1.50 per contract – the exact same on the Dec. 15 $44 call options at the open and it will be a one-third position – as I look to see how much more I can get out of this trade going forward.
Davis Martin is the head trader at DailyProfitMachine.com. He trades SPY Calls and Puts and swing trades mid-large cap stocks and stock options. At the time this commentary was published on RagingBull.com, he had no shares, options or open orders in FXI, but was planning to purchase FXI call options as described here, having closed a swing trade on those same options on Monday.
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