The iShares China Large-Cap ETF (NYSEArca: FXI), one of the largest China exchange traded funds listed in the U.S., is up 13% year-to-date and some traders are wagering that more upside is coming for the big China ETF.
“On Wednesday, one of the biggest ETF options trades of the day was the apparent simultaneous purchase of 40-strike FXI puts expiring in July and 40-strike FXI calls also expiring in July,” reports CNBC. “In this case, the trader appeared to buy 12,000 July 40-strike puts for 90 cents per share, and to simultaneously buy 12,000 July 40-strike calls for 45 cents per share. If held to expiration, the per-share value of the options trade will simply be the distance between the FXI’s closing price on July 21 expiration and $40.”
Earlier this week, index provider MSCI Inc. said it will include China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index beginning in June 2018.
This announcement made Tuesday afternoon has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally.
FXI holds H-shares, or stocks trading in Hong Kong. The MSCI move includes some stocks with listings in Hong Kong and on mainland China.
Traders previously worried about President Donald Trump taking a firm stance on trade policy with China may also feel at ease after the U.S. President said that he became quick friends with Chinese President Xi Jinping during their meeting last week. Moreover, it is unlikely the U.S. will antagonize trade relations with China as the two work together to handle the bigger problem of North Korea.
“The trader may be trying to take advantage of the drop in options prices on the FXI. A year ago, a common measure of expected future moves for the FXI as determined by options prices (“implied volatility”) was at double what the same measure is at now. This trade may betray an expectation that Chinese volatility is set to rise once again,” according to CNBC.
The $3.1 billion FXI holds 51 stocks, 51.7% of which hail from the financial services sector.
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