One Trade To Profit From China's Wild Stock Swings

China’s shares have moved dramatically both up and down over the last several weeks, and this is sure to happen again after the election cycle.

Let's use $FXI as our instrument to construct a directional trade that will allow us to participate in returns if we see a dramatic move in either direction. To do this, we look to the long strangle.

Here's what that will look like.

A long strangle is a long call and a long put with different strikes and the same expiration date. The decision to use this structure is based on its price to entry and no margin required.

Trade structure – the long call AND the long put.

The long call and the long put are taken at the same time, but can be exited individually without margin being necessary.

The long strangle

• Buy to open 1 FXI 15 Nov 30 calls
• Buy to open 1 FXI 15 Nov 27 puts

The long strangle will cost 0.68 at this writing and this will be the total cost and the total exposure in the trade. The breakeven for this trade means that the price of the stock will need to be above $30.68 or below $26.32.

Trade Management

Identify Key Chart Levels

The relative resistance zone sits right around $36 and the relative support is near $25 and we are only using a month because the moves should be swift.

The strategy result provides three choices to exit the trade:

1. To sell the entire strangle once your target profit approaches – this could be anywhere from 30-60%, though if the chart really expands, the upside to profit is unlimited (theoretically).
2. To sell the entire strangle once your threshold for loss is hit. Mine is typically 55%