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Follow-through: iShares China Large-Cap (FXI) call options

Davis MartinDavis Martin ·

The back story: I have been looking at China plays for a while now, largely because the country is opening up access to its A shares, the shares that trade within the country. Previously, anyone investing in Chinese companies would have to do it in purchases made through Hong Kong, as hometown shares were available only to investors based in China.

When it was announced that major index providers were going to switch their holdings to buy A shares and get boots on the ground in China, it was a big, broad buy signal on stocks based in China.

That buy signal, however, is a bit muted due to the headline risk. I don’t want to get too heavy into Chinese stocks if we’re one tweet away from a war with North Korea and uncertain of where China would stand in that kind of conflict.

How I played it: On August 8, I bought 16 December 15 $44 call options on iShares China Large-Cap (FXI), a half position, at $1.48 per contract. I’m looking to double if FXI bases around its current price.

What happened: Minutes after I bought those calls, North Korea threatened to nuke the United States, putting my half-position upside-down pretty much right away. I plan on adding to this position at $1 per contract, which might even happen today.

What I’m looking for now: I still have the second half of my position to buy, but I will be patient.. I’m looking at an upside of 100 percent or more, and I will respect a stop that I will set at 50 percent of my cost basis for the entire position. It may take weeks or months to get there – time or Trump will tell in this case — which is why I went for the longer-dated options here, but with the demand pressure building on the A shares, I think flows into China will make this an interesting story and a potentially good play for a while.

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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. He bought FXI calls on August 8 and was planning to buy more – and trade the entire position – as described in this commentary.

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