The iShares China Large-Cap ETF (NYSEArca: FXI) has soared 7.2% over the past month as the world’s second-largest economy has delivered a batch of economic data points that, for the most part, have been encouraging.
The rally in the $5.7 billion FXI, the largest and most heavily traded China ETF, has made put options, the options contracts purchased by traders wanting to express a bearish view on a security, cheap. Premiums on three-month puts on the iShares China Large-Cap ETF over calls was 3.1 points on Sept. 26, the smallest since May 21, reports Belinda Cao for Bloomberg.
Implied volatility, used to gauge the cost of options, for three-month contracts with an exercise price 10 percent below the China ETF cost retreated 12 percent this month to 24.5 Sept. 27, the lowest since June 4, according to Bloomberg.
If recent history is any indication, cheap puts on FXI could be a sign the ETF is poised to climb higher. In early August, the cost of put contracts on FXI dated six months out had the smallest spread over equivalent call options since mid-June. Since August 5, FXI has climbed 8.6%. [It’s Getting Cheap to Bet Against Big China ETF]
FXI’s implied volatility of 24.5 seen last Friday is far below the nine-month high of 29.6 reached June 25 in the wake of the SHIBOR rate debacle. The SHIBOR debacle prompted elevated concerns about liquidity in the Chinese banking system, which predictably plagued large-cap China ETFs because those funds feature excessive allocations to the financial services sector. The financial services sector accounts for almost 56% of FXI’s weight and six stocks hailing from that sector are found among the ETF’s top-10 holdings. FXI is home to just 26 stocks. [SHIBOR Woes Could Slam These ETFs]
Opening of the Shanghai Free Trade Zone could be a catalyst that sparks FXI and other China ETFs higher into year end. “A total of 25 companies so far have been approved to start operations in a variety of sectors, alongside 11 financial institutions, most of which are domestic banks but including the mainland subsidiaries of Citibank (NYSE: C),” according to Reuters. Last week, Chinese media outlets reported policymakers there will drop bans on social media sites as Facebook (NasdaqGM: FB) and Twitter withing the FTZ.
iShares China Large-Cap ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of FXI.