Options Traders Make Bullish Bets On Big China ETF

“Sanguine” and “trouble-free” are not terms that can be used to accurately describe the current state of affairs in Chinese equity markets, but there is no denying China exchange traded funds have recently been perking up.

Over the past month, the iShares China Large-Cap ETF FXI, the largest China ETF trading in New York, has climbed 6.6 percent and those gains have recently been accelerating. Since Sept. 25, FXI has surged nearly 11 percent. With FXI being home to $5.87 billion in assets under management and also being the most heavily traded U.S.-listed China ETF, traders are acknowledging the fund's near-term improvement.

During the third quarter, investors pulled over $639 million from FXI, but the ETF's recently bullish price action is leading some options buyers to the fund.

“This morning in our ETF/Index Options recap we speak of directional upside call activity in the largest China Equity focused ETF in the marketplace, FXI (iShares China Large Cap, Expense Ratio 0.74%), with the trading centered on October 42 calls. While the options are still well out-of-the-money, the timeliness of the trading given the more than 4.7% surge today in FXI is noteworthy,” said Street One Financial Vice President Paul Weisbruch in a note out Wednesday. 

The implied volatility on those FXI calls is over 36 percent and what makes call buying the October $42 strike particularly noteworthy is that time is not on traders' sides with these contracts. October options expiry is October 16, meaning FXI needs to gain about 9.4 percent from where it trades at this writing to bring profitability into the conversation for those options.

So it is possible that the call buying in FXI is being used as a hedge on a bearish position in the ETF or some of its holdings. However, other data points suggest some traders have been buying shares of leveraged China ETFs, perhaps betting on sharp, short-term bullish moves for stocks in the world's second-largest economy.

As Benzinga reported Tuesday, the Direxion Daily CSI 300 China A Share Bull 2X Shares CHAU, which attempts to deliver double the daily performance of the CSI 300 Index, a widely followed benchmark of mainland or A-shares Chinese equities, could see an uptick in activity as traders cover short positions in A-shares. 

The Direxion Daily FTSE China Bull 3X Shares YINN, the triple-leveraged answer to FXI, could be another ETF that proves alluring to active traders as Chinese stocks rebound.

YINN “a $158 million fund that in spite of rocky price action in the Chinese stock market throughout August and September, has still managed to attract net assets year to date, adding more than $130 million via creation flows,” adds Weisbruch.

CHAU and YINN have each seen positive creation activity over the past month, according to Direxion data.